BANK WITH CONFIDENCE.
BANK WITH TRUST. [CAPTION OF PHOTO - GRAPHIC OMITTED]
In 1997, we saw a continuation of the trend inspired by a "bigger is
better" mentality. Mergers and acquisitions dominated the headlines in banking
and resulted in even more concentration into larger companies. In addition,
regulatory trends encouraged more overlapping of financial services industries.
Similar services are increasingly being offered by banking, brokerage and
insurance companies. Banks also face competition from many larger credit unions
which have maintained their exemption from income taxes, even while expanding to
compete directly with tax-paying firms.
In order to stay fully competitive in this changing environment, the Trust
Company has pursued a strategy which involves significant investment in
technology and in our people. It is based on the merits of "community banking."
These include: personal attention; a board which is focused on the long-term
benefits of reinvesting in our market area; and the quick answers and superior
service that come from knowing the market and servicing our customers here. Our
strategy also includes utilizing business alliances to offer "world class"
products and services that compete favorably with those available elsewhere.
The financial results for 1997 once again show the benefits of this
strategy. The results are discussed more fully in the Management Discussion and
Analysis section of the report; however, I would like to point out a few of the
highlights:
o Diluted Earnings Per Share rose by 14.5% over 1996. Net income of $9.9
million was up 7.4%. Per share figures benefited from the repurchase of shares
in late 1996 and May 1997. The Company's return on assets of 1.61% and return on
average equity of 18.4%, represented a strong performance relative to the
industry.
o Assets grew by 6.0%, while loans and leases increased 7.6%. This reflects
our emphasis on reinvesting local deposits back into the businesses and homes
within our market area, thereby supporting economic growth.
o The quality of our assets remained high. The provision for loan and lease
losses declined by 11.7% from 1996 to 1997.
o Tompkins County Trustco stock was listed on the American Stock Exchange
in February. The trading experience has been excellent, with less trade-to-trade
price volatility and lower spreads between buys and sells.
o We continued to enhance products and services. For example, new
technology has reduced paper flow through computer imaging and storage of
customers' checks.
o Rapid growth continued in Trust and Investment Services, helped by strong
stock and bond market performance, as well as strong new business activity. We
entered into an alliance with the Bank of Castile to provide trust and
investment services through their newly formed Trust Department. Traditionally,
we have enhanced our own services by using alliances to provide investment and
record keeping support. This new alliance represents the first time that we have
acted as the service provider to another institution.
o We partnered with five other community banks in New York State to form a
Small Business Investment Company, Cephas Capital Partners, L.P. This makes
available a new level of financing for growing businesses in our area.
At the end of 1997, Wendell L. Bryce, M.D., retired from our board after
serving for 19 years. Dr. Bryce was an active and supportive director. His
counsel will be missed.
On December 25th, Paul M. O'Leary, Advisor to the Board, passed away at the
age of 96. He served as a director of Tompkins County Trust Company from 1949 to
1971. In addition to his distinguished career at Cornell University, Professor
O'Leary served in key government positions during and after World War II. His
contributions to the Trust Company were highly valued, as was his friendship.
We would like to thank our shareholders for their support in 1997. I'm sure
that our shareholders, in turn, join me in thanking our employees (most of whom
are also shareholders) for their tremendous dedication and commitment. This is
what distinguishes our company and results in long-term success.
/s/ James J. Byrnes
--------------------
James J. Byrnes
1
HIGHLIGHTS
==========
1997 1996 % CHANGE
- -----------------------------------------------------------------------------------------------------------------
Operating Income $55,530,412 $51,088,014 + 8.7%
Net Income 9,855,594 9,179,000 + 7.4%
Net Income Per Share (Basic) $3.04 $2.63 +15.6%
Net Income Per Share (Diluted) $3.00 $2.62 +14.5%
Cash Dividends Paid Per Share $1.24 $1.10 +12.7%
MARKET PRICE & DIVIDEND INFORMATION
===================================
MARKET PRICE CASH
HIGH LOW DIVIDENDS PAID
- -----------------------------------------------------------------------------------------------------------------
See Notes 1 and 2 below:
1996 1st Quarter $32.00 $27.50 $.26
2nd Quarter 31.50 21.50 .27
3rd Quarter 28.00 23.75 .27
4th Quarter 34.25 25.75 .30
1997 1st Quarter $34.75 $31.63 $.30
2nd Quarter 35.75 32.13 .30
3rd Quarter 38.06 34.88 .32
4th Quarter 43.25 38.13 .32
Note 1 - The range of reported high and low transaction prices reflects
inter-dealer prices without retail mark-up, mark-down or commission and do
represent actual transactions as quoted on the Nasdaq National Market or the
American Stock Exchange. The Company's stock was traded on the Nasdaq National
Market during 1996 and January 1997. Effective February 3, 1997, the Company's
stock began trading on the American Stock Exchange.
Note 2 - Dividends were paid on the 15th day of March, June, September, and
December of each year.
SELECTED FINANCIAL DATA
=======================
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31: 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Assets $626,907 $591,344 $536,992 $511,162 $492,155
Deposits 476,700 427,367 370,631 345,776 350,446
Other Borrowings 27,005 15,005 12,000 12,000 12,000
Shareholders' Equity 56,900 52,613 55,091 47,817 47,402
Interest Income 46,813 43,288 40,204 35,676 34,365
Interest Expense 20,182 17,916 16,526 12,911 11,887
Net Interest Income 26,630 25,371 23,678 22,765 22,478
Provision for Loan/Lease Losses 1,068 1,210 751 768 1,207
Net Securities Gains (85) -0- -0- 121 -0-
Net Income 9,856 9,179 8,718 8,137 8,135
Basic Earnings Per Share 3.04 2.63 2.46 2.29 2.27
Diluted Earnings Per Share 3.00 2.62 2.45 2.27 2.26
Cash Dividends Per Share 1.24 1.10 .99 .91 .82
Return on Average Assets 1.61% 1.62% 1.67% 1.62% 1.75%
Return on Average
Shareholders' Equity 18.41% 16.82% 17.02% 17.20% 19.16%
Shareholders' Equity to
Average Assets 9.3% 9.2% 10.2% 9.5% 9.4%
Dividend Payout Ratio 40.7% 41.5% 40.2% 39.7% 35.8%
(ACTUAL NUMERICAL COUNT)
- -----------------------------------------------------------------------------------------------------------------------------
Employees (Average
Full-Time Equivalent) 223 221 219 219 219
Shareholders of Record 998 1,044 1,034 1,096 1,060
Full Service Banking Offices 11 11 10 10 10
Bank Access Centers (ATMs) 21 20 20 19 17
2
[PAGES 3 THROUGH 7 CONTAIN PHOTOS/GRAPHICS AND HAVE THEREFORE BEEN OMITTED]
CONSOLIDATED STATEMENTS OF CONDITION
====================================
DECEMBER 31
1997 1996
--------------------------------
ASSETS
Cash and noninterest bearing balances due from banks $ 22,088,775 $ 25,318,664
Federal funds sold 3,000,000 -0-
Available-for-sale securities, at fair value 176,660,315 167,903,720
Held-to-maturity securities, fair value of $37,881,959
in 1997 and $38,784,390 in 1996 36,910,971 37,752,933
Loans and leases, net of unearned income 377,183,969 350,409,423
Less reserve for loan/lease losses 4,978,600 4,778,600
--------------------------------
NET LOANS 372,205,369 345,630,823
Bank premises and equipment, net 6,831,875 6,923,996
Accrued interest and other assets 9,209,901 7,814,321
--------------------------------
TOTAL ASSETS $ 626,907,206 $ 591,344,457
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 63,364,146 $ 59,738,079
Savings and money market 140,185,052 133,799,221
Time 185,435,402 155,832,604
Non-interest bearing 87,715,070 77,996,989
--------------------------------
TOTAL DEPOSITS 476,699,670 427,366,893
Federal funds purchased and
securities sold under agreements to repurchase 57,998,453 89,992,723
Other borrowings 27,005,000 15,005,000
Other liabilities 8,304,278 6,366,912
--------------------------------
TOTAL LIABILITIES $ 570,007,401 $ 538,731,528
--------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' equity:
Common Stock - par value $0.10 per share:
Authorized 7,500,000 shares; issued and outstanding,
3,258,807 shares in 1997 and 3,336,394 shares in 1996 $ 325,881 $ 333,639
Surplus 29,935,429 32,529,590
Undivided profits 26,769,359 20,925,196
Treasury Stock at cost, 20,046 shares in 1997, 21,203 shares in 1996 (571,311) (604,286)
Net unrealized gain on available-for-sale securities,
net of taxes 1,073,768 65,651
Deferred I.S.O.P. benefit expense, 21,110 shares in 1997,
21,228 shares in 1996 (633,321) (636,861)
--------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 56,899,805 $ 52,612,929
--------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 626,907,206 $ 591,344,457
================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
CONSOLIDATED STATEMENTS OF INCOME
=================================
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------
INTEREST INCOME
Loans $ 32,686,349 $ 30,591,014 $ 28,963,154
Deposits with other banks -0- 48,465 -0-
Federal funds sold 263,216 468,193 318,800
Available-for-sale securities 11,919,096 10,206,131 8,794,810
Held-to-maturity securities 1,943,882 1,973,711 2,127,045
-----------------------------------------------
TOTAL INTEREST INCOME 46,812,543 43,287,514 40,203,809
-----------------------------------------------
INTEREST EXPENSE
Deposits:
Time certificates of deposit of $100,000 or more 4,629,062 2,362,587 643,214
Other deposits 10,240,468 9,776,583 10,017,458
Federal funds purchased and securities
sold under agreements to repurchase 4,233,012 4,831,391 5,178,859
Other borrowings 1,079,762 945,589 686,384
-----------------------------------------------
TOTAL INTEREST EXPENSE 20,182,304 17,916,150 16,525,915
-----------------------------------------------
NET INTEREST INCOME 26,630,239 25,371,364 23,677,894
LESS PROVISION FOR LOAN/LEASE LOSSES 1,067,931 1,209,943 751,258
-----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN/LEASE LOSSES 25,562,308 24,161,421 22,926,636
-----------------------------------------------
OTHER INCOME
Trust and investment services income 3,159,404 2,660,358 2,290,328
Service charges on deposit accounts 1,754,646 1,712,526 1,683,843
Credit card merchant income 2,205,841 1,891,767 1,645,456
Other service charges 1,355,871 1,318,038 1,173,403
Other operating income 327,075 217,811 482,167
Loss on available-for-sale securities (84,968) -0- -0-
-----------------------------------------------
TOTAL OTHER INCOME 8,717,869 7,800,500 7,275,197
-----------------------------------------------
OTHER EXPENSES
Salaries and wages 8,106,940 7,509,542 7,115,591
Pension and other employee benefits 1,906,550 1,759,191 1,830,579
Net occupancy expense of bank premises 1,313,579 1,336,771 1,243,756
Net furniture and fixture expense 1,114,235 1,134,344 1,062,656
Credit card operating expense 2,023,798 1,751,495 1,475,258
Other operating expenses 4,692,480 4,149,654 4,137,778
-----------------------------------------------
TOTAL OTHER EXPENSES 19,157,582 17,640,997 16,865,618
-----------------------------------------------
INCOME BEFORE INCOME TAXES 15,122,595 14,320,924 13,336,215
INCOME TAXES 5,267,001 5,141,924 4,618,404
-----------------------------------------------
NET INCOME $ 9,855,594 $ 9,179,000 $ 8,717,811
===============================================
Net income per common share:
Basic $ 3.04 $ 2.63 $ 2.46
Diluted $ 3.00 $ 2.62 $ 2.45
===============================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------
OPERATING ACTIVITIES
Net income $ 9,855,594 $ 9,179,000 $ 8,717,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan/lease losses 1,067,931 1,209,943 751,258
Depreciation and amortization 1,073,954 1,029,362 973,599
Net amortization (accretion) on securities 200,706 (133,490) (271,826)
Provision (benefit) for deferred income taxes (468,632) (93,966) 125,388
Net loss on sale of investments 84,968 -0- -0-
Net gain on sales of loans (8,587) (6,483) (257,293)
Net gain on sales of bank premises and equipment (44,437) (7,904) (12,890)
Increase in other assets (1,499,004) (373,305) (362,727)
I.S.O.P. shares released for allocation 3,937 320,221 325,057
Increase in other liabilities 1,675,982 709,897 1,243,114
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,942,412 11,833,275 11,231,491
--------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 50,519,654 60,749,656 13,119,228
Proceeds from maturities of held-to-maturity securities 10,522,343 6,883,128 39,820,981
Proceeds from sales of available-for-sale securities 10,683,519 -0- -0-
Purchases of available-for-sale securities (68,412,423) (82,952,871) (2,060,287)
Purchases of held-to-maturity securities (9,775,267) (6,123,619) (59,600,643)
Proceeds from sales of loans 3,305,830 1,047,969 10,824,697
Net increase in loans (30,939,720) (30,162,807) (31,669,829)
Proceeds from sales of bank premises and equipment 64,245 18,100 34,710
Purchases of bank premises and equipment (898,217) (790,156) (1,061,808)
Deposit premium on acquired branch -0- (500,000) -0-
Loans of acquired branch -0- (1,133,097) -0-
--------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (34,930,036) (52,963,697) (30,592,951)
--------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
money market accounts, and savings accounts 19,729,979 (13,092,892) 7,880,529
Net increase in time deposits 29,602,798 60,195,849 16,974,651
Demand deposits, money market accounts, and
savings accounts of acquired branch -0- 5,680,482 -0-
Time deposits of acquired branch -0- 3,952,417 -0-
Net decrease in Federal Funds purchased and
securities sold under repurchase agreements (31,994,270) (2,909,643) (9,335,787)
Net increase in other borrowings 12,000,000 3,000,000 -0-
Cash dividends (4,011,431) (3,813,397) (3,506,291)
Sale of treasury stock 41,079 20,537 -0-
Purchase of treasury stock -0- (627,000) -0-
Repurchase of common shares (2,670,000) (6,720,202) -0-
Net proceeds from issuance of common stock 59,580 6,061 57
--------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,757,735 45,692,212 12,013,159
--------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (229,889) 4,561,790 (7,348,301)
Cash and cash equivalents at beginning of year 25,318,664 20,756,874 28,105,175
--------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,088,775 $ 25,318,664 $ 20,756,874
============================================
Supplemental disclosure of cash-flow information:
Cash paid during the year for:
Interest $ 20,148,001 $ 17,897,649 $ 15,545,784
Income taxes 5,472,706 5,302,225 4,145,301
--------------------------------------------
Non-cash investing and financing activities:
Change in net unrealized holding gain (loss) on
available-for-sale securities $ 1,738,133 $ (1,454,674) $ 2,994,864
Transfer of securities to available-for-sale -0- -0- 87,516,398
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
10
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
==================================
NET UNREALIZED
GAIN (LOSS) DEFERRED
ON AVAILABLE- I.S.O.P.
COMMON TREASURY UNDIVIDED FOR-SALE BENEFIT
STOCK STOCK SURPLUS PROFITS SECURITIES EXPENSE TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
JANUARY 1, 1995 $325,483 $ -0- $29,799,673 $19,788,258 $ (828,709) $(1,267,992) $47,816,713
- --------------------------------------------------------------------------------------------------------------------------------
Net income 8,717,811 8,717,811
Exercise of stock
options (453 shares) 41 8,590 8,631
10% stock dividend
(325,228 shares at
$29 per share) 32,522 9,399,091 (9,440,185) (8,572)
Cash dividends
($.99 per share) (3,506,291) (3,506,291)
Change in net unrealized
gain (loss), net of taxes 1,738,070 1,738,070
I.S.O.P. shares released for
allocation (11,397 shares) (16,883) 341,940 325,057
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1995 358,046 -0- 39,190,471 15,559,593 909,361 (926,052) 55,091,419
- --------------------------------------------------------------------------------------------------------------------------------
Net income 9,179,000 9,179,000
Exercise of stock
options (302 shares) 30 6,031 6,061
Common stock repurchased
and returned to authorized
and unissued status
(244,371 shares) (24,437) (6,695,765) (6,720,202)
Cash dividends
($1.10 per share) (3,813,397) (3,813,397)
Treasury stock purchased
(22,000 shares) (627,000) (627,000)
Treasury stock sold
(797 shares) 22,714 (2,177) 20,537
Change in net unrealized
gain (loss), net of taxes (843,710) (843,710)
I.S.O.P. shares released for
allocation (9,640 shares) 31,030 289,191 320,221
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1996 333,639 (604,286) 32,529,590 20,925,196 65,651 (636,861) 52,612,929
- --------------------------------------------------------------------------------------------------------------------------------
Net income 9,855,594 9,855,594
Exercise of stock
options (2,413 shares) 242 59,338 59,580
Common stock repurchased
and returned to authorized
and unissued status
(80,000 shares) (8,000) (2,662,000) (2,670,000)
Cash dividends
($1.24 per share) (4,011,431) (4,011,431)
Treasury stock sold
(1,157 shares) 32,975 8,104 41,079
Change in net unrealized
gain (loss), net of taxes 1,008,117 1,008,117
I.S.O.P. shares released for
allocation (118 shares) 397 3,540 3,937
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1997 $325,881 $(571,311) $29,935,429 $26,769,359 $1,073,768 $ (633,321) $56,899,805
================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
11
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Tompkins County Trustco, Inc. ("the Company") is a registered bank
holding company, organized under the laws of New York State. On April 26, 1995,
the shareholders of Tompkins County Trust Company (the "Trust Company") approved
a proposal to revise its corporate structure by establishing the Company as a
one-bank holding company. On January 1, 1996, the Trust Company became a wholly
owned subsidiary of the Company and all outstanding shares of Trust Company
common stock were converted to common shares of the Company. The holding company
formation was accounted for similar to a pooling of interests. Accordingly, the
financial information included herein combines the results of operations, and
the assets, liabilities, and shareholders' equity of the Company and the Trust
Company for all periods presented. The Trust Company traces its charter back to
1836 and provides loan, deposit, and trust services to its customers primarily
in Tompkins County, New York, and surrounding areas.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, the Trust Company. All significant intercompany
balances and transactions are eliminated in consolidation. A description of
significant accounting policies is presented below.
BASIS OF PRESENTATION: The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS: Cash equivalents in the consolidated statements of cash flows
include cash and due from banks.
SECURITIES: Management determines the appropriate classification of debt and
equity securities at the time of purchase. Securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
excluded from earnings and reported as a separate component of shareholders'
equity.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the interest method. Dividend and
interest income are recognized when earned. Realized gains and losses on the
sale of securities are included in securities gains (losses). The cost of
securities sold is based on the specific identification method.
Transfers of securities between categories are recorded at fair value at the
date of transfer.
A decline in the fair value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary is charged to
earnings, resulting in the establishment of a new cost basis for the security.
LOANS AND LEASES: Loans are reported at their principal outstanding balance net
of deferred loan fees and costs, and unearned income. The Company provides motor
vehicle and equipment financing to its customers through direct financing
leases. These leases are carried at the aggregate of lease payments receivable,
plus estimated residual values, less unearned income. Unearned income on direct
financing leases is amortized over the lease terms resulting in a level rate of
return.
RESERVE FOR LOAN/LEASE LOSSES: The reserve for loan/lease losses is periodically
evaluated by management in order to maintain the reserve at a level sufficient
to absorb probable credit losses. Management's evaluation of the adequacy of the
reserve is based upon a review of the Company's historical loss experience,
known and inherent risks in the loan and lease portfolios, the estimated value
of collateral, and trends in delinquencies. External factors such as the level
and trend of interest rates and the national and local economies are also
considered.
Management considers a loan to be impaired if, based on current information, it
is probable that the Company will be unable to collect all scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of collateral if the
loan is collateral dependent. Management excludes large groups of smaller
balance homogeneous loans such as residential mortgages and consumer loans which
are collectively evaluated. Impairment losses are included in the reserve for
loan/lease losses through a charge to the provision for loan/lease losses.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS: Loans, including impaired
loans, are generally classified as nonaccrual if they are past due as to
maturity or payment of principal or interest for a period of more than 90 days,
unless such loans are well secured and in the process of collection. Loans that
are past due less than 90 days may also be classified as nonaccrual if repayment
in full of principal or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable time period, and there is a sustained period of repayment
performance by the borrower in accordance with the con-
12
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
tractual terms of the loan agreement. Payments received on loans carried as
nonaccrual are generally applied as a reduction to principal. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis.
OTHER REAL ESTATE OWNED: Other real estate owned consists of properties formerly
pledged as collateral to loans, which have been acquired by the Company through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Other
real estate owned is carried at the lower of the recorded investment in the loan
or the fair value of the real estate, less estimated costs to sell. Upon
transfer of a loan to foreclosure status, an appraisal is obtained and any
excess of the loan balance over the fair value, less estimated costs to sell, is
charged against the provision for loan losses. Expenses and subsequent
adjustments to the fair value are treated as other operating expense.
BANK PREMISES AND EQUIPMENT: Land is carried at cost. Bank premises and
equipment are stated at cost, less allowances for depreciation. The provision
for depreciation for financial reporting purposes is computed generally by the
straight-line method at rates sufficient to write-off the cost of such assets
over their estimated useful lives. Bank premises are amortized over a period of
10-39 years, and furniture, fixtures, and equipment are amortized over a period
of 2-20 years. Maintenance and repairs are charged to expense as incurred.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
RETIREMENT PLANS: The Company's funding policy is to contribute the maximum
amount annually that can be deducted for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date, but for those expected to be earned in the future.
OTHER POSTRETIREMENT BENEFITS: The estimated costs of providing medical and
life insurance benefits are accrued over the years the employees render services
necessary to earn those benefits. The Company is amortizing the discounted
present value of the accumulated postretirement benefit obligation at January 1,
1993, over a 20-year transition period.
DEPOSIT BASE INTANGIBLE: Deposit base intangible asset, resulting from a branch
acquisition in 1996, is being amortized over the expected useful life of five
years on a straight line basis. The amortization period is monitored to
determine if circumstances require such period to be reduced. The Company
periodically reviews its deposit base intangible asset for changes in
circumstances that may indicate the carrying amount of the assets is impaired.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The Company enters into sales of
U.S. Treasury and agency securities under agreements to repurchase (repurchase
agreements). These repurchase agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as liabilities in the
consolidated statements of financial condition. The amount of the securities
underlying the agreements remains in the asset account. The Company has agreed
to repurchase securities identical to those sold.
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK: The Company does not engage
in the use of derivative financial instruments, and the Company's only financial
instruments with off balance sheet risk are loan commitments, standby letters of
credit, and commercial lines of credit.
TRUST AND INVESTMENT SERVICES DIVISION: Assets held in fiduciary or agency
capacities for customers are not included in the accompanying consolidated
statements of condition, since such items are not assets of the Company. Fees
associated with providing trust management services are recorded on a cash basis
of income recognition and are included in Other Income.
EARNINGS PER SHARE: On December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." The statement supersedes Accounting Principles Board Opinion No. 15,
"Earnings Per Share," and specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock. It requires dual presentation of "Basic EPS" and "Diluted
EPS" on the face of the income statement for all entities with complex capital
structures. All prior period EPS data has been restated to conform to the
provisions of this statement.
Basic earnings per share is calculated by dividing net income available to
common shareholders by the weighted average number of shares outstanding during
the year. Diluted earnings per share includes the maximum dilutive effect of
stock issuable upon conversion of stock options.
TREASURY STOCK: The cost of treasury stock is shown on the consolidated
statements of condition as a separate component of shareholders' equity, and is
a reduction to total shareholders' equity. Shares are released from treasury at
fair value, with any gain or loss on the sale reflected as an adjustment to
surplus. All shares currently carried in treasury are the result of a single
purchase; therefore, the cost basis for shares released is equal to the actual
cost.
RECLASSIFICATION: Certain reclassifications have been made to prior period
amounts to conform to current year presentation.
13
NOTE 2 SECURITIES
The following summarizes securities:
AVAILABLE-FOR-SALE SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES AND
OBLIGATIONS OF U.S.
GOVERNMENT AGENCIES $135,152,125 $1,199,803 $221,960 $136,129,968
MORTGAGE-BACKED SECURITIES 30,673,716 492,337 46,793 31,119,260
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT SECURITIES 165,825,841 1,692,140 268,753 167,249,228
EQUITY SECURITIES 8,983,150 427,938 -0- 9,411,088
- -----------------------------------------------------------------------------------------------------------------------------
$174,808,991 $2,120,078 $268,753 $176,660,316
=============================================================================================================================
Available-for-sale securities includes $3,050,400 in equity securities, which
are carried at amortized cost since fair values are not readily determinable.
This figure includes $2,014,100 of Federal Home Loan Bank Stock.
HELD-TO-MATURITY SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS $36,910,971 $971,712 $724 $37,881,959
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT SECURITIES $36,910,971 $971,712 $724 $37,881,959
=============================================================================================================================
AVAILABLE-FOR-SALE SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES AND
OBLIGATIONS OF U.S.
GOVERNMENT AGENCIES $142,647,771 $ 948,407 $ 867,546 $142,728,632
MORTGAGE-BACKED SECURITIES 22,092,358 201,525 169,195 22,124,688
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT SECURITIES 164,740,129 1,149,932 1,036,741 164,853,320
- -----------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES 3,050,400 -0- -0- 3,050,400
- -----------------------------------------------------------------------------------------------------------------------------
$167,790,529 $1,149,932 $1,036,741 $167,903,720
=============================================================================================================================
Available-for-sale securities includes $3,050,400 in equity securities, which
are carried at amortized cost since fair values are not readily determinable.
This figure includes $2,014,100 of Federal Home Loan Bank Stock.
HELD-TO-MATURITY SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS $37,752,933 $1,045,055 $13,598 $38,784,390
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT SECURITIES $37,752,933 $1,045,055 $13,598 $38,784,390
=============================================================================================================================
The amortized cost and estimated fair value of debt securities by contractual
maturity are shown in the following table. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AMORTIZED FAIR
DECEMBER 31, 1997 COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES:
DUE IN ONE YEAR OR LESS $ 18,432,845 $ 18,522,106
DUE AFTER ONE YEAR THROUGH FIVE YEARS 49,730,939 49,945,771
DUE AFTER FIVE YEARS THROUGH TEN YEARS 66,988,341 67,662,091
- -----------------------------------------------------------------------------------------------------------------------------
135,152,125 136,129,968
MORTGAGE-BACKED SECURITIES 30,673,716 31,119,260
EQUITY SECURITIES 8,983,150 9,411,088
- -----------------------------------------------------------------------------------------------------------------------------
$174,808,991 $176,660,316
=============================================================================================================================
14
NOTE 2 SECURITIES CONTINUED
AMORTIZED FAIR
DECEMBER 31, 1997 COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
DUE IN ONE YEAR OR LESS $ 9,823,783 $ 9,844,434
DUE AFTER ONE YEAR THROUGH FIVE YEARS 22,443,750 23,155,863
DUE AFTER FIVE YEARS THROUGH TEN YEARS 4,298,438 4,485,335
DUE AFTER TEN YEARS 345,000 396,327
- -----------------------------------------------------------------------------------------------------------------------------
$ 36,910,971 $ 37,881,959
=============================================================================================================================
Gains from the sales of available-for-sale securities in 1997 were $313; losses
from the sales of available-for-sale securities were $85,281. There were no
gains or losses from the sale of securities in 1996 or 1995.
In November 1995, the Financial Accounting Standards Board published "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" (Guide). Concurrent with the initial adoption of the
Guide but no later than December 31, 1995, the Company was permitted to reassess
the appropriateness of the classifications of all securities held at that time
and implement reclassifications without calling into question the intent of the
Company to hold other debt securities to maturity in the future. Effective
December 31, 1995, the Company transferred U.S. government agencies and
corporate bonds, with a total amortized cost of $87,516,398 and a total fair
value of $87,593,693, from the held-to-maturity portfolio to the
available-for-sale portfolio. The net unrealized loss was $77,295. The
transferred securities were reported at fair value, with the unrealized loss
excluded from earnings and reported as a separate component of shareholders'
equity, net of taxes.
At December 31, 1997, securities with an amortized cost of $103,751,531 were
pledged to secure public deposits (as required by law).
NOTE 3 LOAN CLASSIFICATION SUMMARY AND RELATED PARTY TRANSACTIONS
Loans at December 31, 1997, and 1996 are as follows: 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL REAL ESTATE $159,296,594 $142,675,619
COMMERCIAL REAL ESTATE 61,341,666 47,674,052
REAL ESTATE CONSTRUCTION 5,267,122 1,202,577
COMMERCIAL 78,611,556 85,044,519
CONSUMER AND OTHER 60,090,261 62,488,205
LEASES 14,313,480 12,740,301
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 378,920,679 351,825,273
LESS UNEARNED INCOME (1,736,710) (1,415,850)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS, NET OF UNEARNED INCOME $377,183,969 $350,409,423
=============================================================================================================================
Directors and officers of the Company and their affiliated companies were
customers of, and had other transactions with the Company in the ordinary course
of business. Such loans and commitments were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and did not involve more than
normal risk of collectibility or present other unfavorable features.
Loan transactions with related parties are summarized as follows:
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1 $ 2,602,603 $ 2,899,869
RETIRED DIRECTOR (22) (155)
RESIGNED DIRECTORS -0- (263,600)
NEW EXECUTIVE OFFICERS -0- 95,466
NEW LOANS AND ADVANCES 2,690,781 603,540
LOAN PAYMENTS (1,296,744) (732,517)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31 $ 3,996,618 $ 2,602,603
=============================================================================================================================
During 1997, the Company sold $3,305,830 of education loans to the Student Loan
Mortgage Association and recognized a gain of $8,587, which is included in other
operating income in the consolidated statements of income. During 1996, the
Company sold $847,219 of education loans to the Student Loan Mortgage
Association and sold $200,750 of mortgage loans to the Federal Home Loan
Mortgage Corporation. The net gain on sale of loans in 1996 was $6,483.
At December 31, 1997, the Company serviced mortgage loans for others aggregating
$28,177,138, compared to $32,405,770 at December 31, 1996.
The Company's market area encompasses primarily Tompkins County, New York and
surrounding areas. Substantially all of the Company's outstanding loans are with
borrowers living or doing business within 25 miles of the branches in its market
area. Other than general economic risks, management is not aware of any material
concentrations of credit risk to any industry or individual borrower.
15
NOTE 4 RESERVE FOR LOAN/LEASE LOSSES
Changes in the reserve for loan/lease losses are summarized as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
RESERVE AT BEGINNING OF YEAR $4,778,600 $4,703,600 $4,653,600
PROVISIONS CHARGED TO OPERATIONS 1,067,931 1,209,943 751,258
RECOVERIES ON LOANS/LEASES 486,927 414,994 402,159
LOANS/LEASES CHARGED-OFF (1,354,858) (1,549,937) (1,103,417)
- -----------------------------------------------------------------------------------------------------------------------------
RESERVE AT END OF YEAR $4,978,600 $4,778,600 $4,703,600
=============================================================================================================================
The Company's recorded investment in loans/leases that are considered impaired
totaled $1.4 million at December 31, 1997, and $1.2 million at December 31,
1996. The average recorded investment in impaired loans/leases was $962,000 in
1997, $1.3 million in 1996, and less than $1 million in 1995. The December 31,
1997 recorded investment in impaired loans/leases includes $806,000 of
loans/leases which had related reserves of $329,000. The December 31, 1996
recorded investment in impaired loans/leases includes $582,000 of loans/leases
which had related reserves of $94,000. The effect on interest income for
impaired loans/leases was not material to the accompanying financial statements
for 1997, 1996, or 1995.
The principal balance of loans/leases not accruing interest, including impaired
loans/leases, amounted to approximately $2,783,000, and $1,994,000 at December
31, 1997 and 1996, respectively. The difference between the interest income that
would have been recorded if these loans/leases had been paid in accordance with
their original terms and the interest income recorded in the three year period
ended December 31, 1997 was immaterial.
NOTE 5 BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31 were as follows:
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
LAND $ 682,554 $ 682,554
BANK PREMISES 6,536,277 6,392,038
FURNITURE, FIXTURES, AND EQUIPMENT 9,712,552 9,520,792
ACCUMULATED DEPRECIATION (10,099,508) (9,671,388)
- -----------------------------------------------------------------------------------------------------------------------------
$ 6,831,875 $ 6,923,996
=============================================================================================================================
Depreciation and amortization expense in 1997, 1996, and 1995 are included in
operating expenses as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
BANK PREMISES $296,006 $ 312,369 $319,704
FURNITURE, FIXTURES, AND EQUIPMENT 674,525 716,993 653,895
- -----------------------------------------------------------------------------------------------------------------------------
$970,531 $1,029,362 $973,599
=============================================================================================================================
NOTE 6 DEPOSITS
The aggregate total time deposits of $100,000 or more was $97,128,468 at
December 31, 1997, and $70,022,038 at December 31, 1996. As of December 31,
1997, the Company had time deposits with scheduled maturities as follows:
LESS THAN $100,000
(IN THOUSANDS) $100,000 AND OVER TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
MATURITY:
THREE MONTHS OR LESS $25,562 $65,634 $ 91,196
OVER THREE THROUGH SIX MONTHS 21,622 23,929 45,551
OVER SIX THROUGH TWELVE MONTHS 22,916 5,528 28,444
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DUE IN 1998 70,100 95,091 165,191
1999 12,290 804 13,094
2000 2,234 1,132 3,366
2001 850 101 951
2002 AND THEREAFTER 2,833 0 2,833
- -----------------------------------------------------------------------------------------------------------------------------
$88,307 $97,128 $185,435
=============================================================================================================================
16
NOTE 7 FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information regarding securities sold under agreements to repurchase as of
December 31, 1997, is summarized below:
ASSETS SOLD REPURCHASE LIABILITY
- -----------------------------------------------------------------------------------------------------------------------------
Carrying Fair Interest
Amount Value Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------
MATURITY/TYPE OF ASSET
2 TO 30 DAYS:
U.S. TREASURY SECURITIES $ 2,979,406 $ 3,072,187 $ 3,000,000 5.65%
MORTGAGE-BACKED SECURITIES 100,000 103,844 100,000 5.20%
31 TO 90 DAYS:
MORTGAGE-BACKED SECURITIES 180,000 186,919 180,000 5.50%
OVER 90 DAYS:
U.S. TREASURY SECURITIES 5,631,420 5,727,223 5,597,180 5.78%
U.S. GOVERNMENT AGENCY SECURITIES 1,355,550 1,350,965 1,355,550 5.72%
MORTGAGE-BACKED SECURITIES 512,583 516,596 509,500 5.59%
DEMAND:
U.S. TREASURY SECURITIES 11,511,984 11,650,636 11,514,500 5.58%
U.S. GOVERNMENT AGENCY SECURITIES 26,359,088 26,412,329 26,359,843 5.15%
MORTGAGE-BACKED SECURITIES 9,574,326 9,713,816 9,381,880 5.39%
- -----------------------------------------------------------------------------------------------------------------------------
$ 58,204,357 $58,734,515 $57,998,453 5.38%
=============================================================================================================================
At December 31, 1997, substantially all of the above securities were held by the
Bank of New York or the Federal Reserve Bank of New York.
Additional information regarding securities sold under agreements to repurchase
and Federal funds purchased for the years ended December 31 is detailed in the
table below:
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OUTSTANDING AT DECEMBER 31 $ 57,998,453 $ 86,192,723
MAXIMUM MONTH-END BALANCE 93,176,636 104,045,238
AVERAGE BALANCE DURING THE YEAR 79,075,374 92,383,979
AVERAGE INTEREST RATE PAID DURING YEAR 5.28% 5.20%
=============================================================================================================================
FEDERAL FUNDS PURCHASED 1997 996
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OUTSTANDING AT DECEMBER 31 $ -0- $ 3,800,000
MAXIMUM MONTH-END BALANCE 13,500,000 3,800,000
AVERAGE BALANCE DURING THE YEAR 1,039,178 545,902
AVERAGE INTEREST RATE PAID DURING YEAR 5.94% 7.25%
=============================================================================================================================
NOTE 8 OTHER BORROWINGS
The Company has available line of credit agreements with banks permitting
borrowings to a maximum of approximately $8,500,000. No advances were
outstanding against those lines on December 31, 1997.
As a member of the Federal Home Loan Bank, the Bank may apply for advances
secured by certain residential mortgage loans and other assets, provided that
certain standards for credit worthiness have been met. At December 31, 1997, the
Bank had $57,630,000 in established unused lines of credit with the Federal Home
Loan Bank. At December 31, 1997, the Bank had $27,000,000 in term advances from
the FHLB, compared to $15,000,000 at December 31, 1996. FHLB term advances due
in one year or less as of December 31, 1997 and 1996 are detailed in the table
below.
Federal Home Loan Bank Advances: 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
DUE IN ONE YEAR OR LESS:
TOTAL OUTSTANDING AT DECEMBER 31 $ 27,000,000 $ 8,000,000
MAXIMUM MONTH-END BALANCE 29,000,000 9,000,000
AVERAGE BALANCE DURING THE YEAR 15,219,178 3,288,251
AVERAGE INTEREST RATE PAID DURING YEAR 5.96% 5.80%
=============================================================================================================================
At December 31, 1996, the Bank had $7 million in advances due in more than one
year, with interest rates that ranged from 5.84% to 6.46%, all of which had
maturities in 1998.
Other borrowings at December 31, 1997 and 1996 included a $5,000 Treasury Tax
and Loan Note account with the Federal Reserve Bank of New York.
17
NOTE 9 EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and a percentage of the employee's average compensation for the five highest
consecutive years in the last ten years of employment.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated statements of condition at December 31, 1997 and
1996:
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
ACCUMULATED BENEFIT OBLIGATION, INCLUDING VESTED BENEFITS OF
$10,335,574 IN 1997 AND $8,521,640 IN 1996. $(10,408,058) $ (8,574,571)
=============================================================================================================================
PROJECTED BENEFIT OBLIGATION FOR SERVICE RENDERED TO DATE (12,402,247) $(10,569,701)
PLAN ASSETS AT FAIR VALUE, PRIMARILY GOVERNMENT SECURITIES AND COMMON STOCKS
INCLUDING THE COMPANY STOCK HAVING A FAIR VALUE OF
$1,110,639 AND $736,364 AT SEPTEMBER 30, 1997 AND 1996, RESPECTIVELY 14,969,632 12,001,460
- -----------------------------------------------------------------------------------------------------------------------------
PLAN ASSETS OVER PROJECTED BENEFIT OBLIGATION 2,567,385 1,430,711
UNRECOGNIZED NET LOSS FROM PAST EXPERIENCE DIFFERENT FROM THAT
ASSUMED AND CHANGES IN ASSUMPTIONS (334,243) 471,769
PRIOR SERVICE COST NOT YET RECOGNIZED IN NET PERIODIC PENSION COST 187,450 202,346
UNRECOGNIZED NET ASSET AT SEPTEMBER 30, 1997 NET OF AMORTIZATION (418,410) (487,134)
- -----------------------------------------------------------------------------------------------------------------------------
PREPAID PENSION COST INCLUDED IN OTHER ASSETS $ 2,002,182 $ 1,617,692
=============================================================================================================================
Net periodic pension cost included the following components: 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
SERVICE COST BENEFITS EARNED DURING THE PERIOD $ 489,125 $ 332,115 $ 326,242
INTEREST COST ON PROJECTED BENEFIT OBLIGATION 847,581 731,029 697,552
ACTUAL RETURN ON PLAN ASSETS (2,863,009) (1,160,837) (1,452,811)
NET AMORTIZATION AND DEFERRAL 1,799,813 192,326 659,144
- -----------------------------------------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 273,510 $ 94,633 $ 230,127
=============================================================================================================================
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7.5% and 5.0% respectively at December 31, 1997 and 1996. The
expected long-term rate of return on plan assets was 8.5% in 1997 and 1996. The
Company's contributions to the plan totaled $658,000 in 1997, $515,409 in 1996,
and $642,359 in 1995.
In addition, the Company has an Investment and Stock Ownership Plan ("I.S.O.P.")
which contains a deferred profit-sharing and employee stock ownership plan which
covers substantially all employees. The I.S.O.P. allows for contributions either
in the form of cash or stock of the Company. Contributions are determined by the
Board of Directors and are limited to a maximum amount as stipulated in the
plan.
In 1994, the employee stock ownership plan of the I.S.O.P. borrowed $1,650,000
from the Company to purchase 55,000 common shares of the Company. The debt has a
term of 10 years and an interest rate of 7%. At December 31, 1997, 33,889 shares
were released and 21,110 remained as unallocated shares. The fair value of the
unallocated shares on December 31, 1997, was $899,683. Shares will be released
to the employee stock ownership plan based on the principal only method. Cash
dividends received by the employee stock ownership plan on unallocated shares
will be used to pay down the employee stock ownership plan's debt. The Company
recognized compensation expense for the I.S.O.P. of $342,950 in 1997, $324,158
in 1996, and $325,057 in 1995 based on the fair value of shares committed to be
released. At December 31, 1997, approximately 8,047 shares of unallocated stock
were committed to be released to fund the Company's 1997 contribution to the
employee stock option plan.
The Company currently provides certain life and health insurance benefits to
substantially all of its employees.
In addition to the defined pension plan, the Company offers postretirement
medical coverage, life insurance and prescription drug coverage to full time
employees who have worked 10 years and attained age 55. Medical coverage is
contributory with contributions reviewed annually. The Company assumes the
majority of the cost for all benefits, while retirees share some of the cost
through co-insurance and deductibles.
The following table represents the plan's funded status and amounts recognized
in the Company's consolidated statements of condition at December 31, 1997 and
1996:
18
NOTE 9 EMPLOYEE BENEFIT PLANS CONTINUED
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
RETIREES $ (1,626,419) $ (1,486,321)
ACTIVE EMPLOYEES (522,551) (598,067)
SPOUSES AND OTHERS (855,201) (805,871)
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (3,004,171) (2,890,259)
PLAN ASSETS AT FAIR VALUE -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
IN EXCESS OF PLAN ASSETS (3,004,171) (2,890,259)
UNRECOGNIZED TRANSITION OBLIGATION 1,732,821 1,848,343
UNRECOGNIZED (GAIN) LOSS (133,555) (138,039)
- -----------------------------------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST INCLUDED IN OTHER LIABILITIES $ (1,404,905) $ (1,179,955)
=============================================================================================================================
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits (the health care cost trend rate) is 8.5% beginning in 1997,
and is assumed to decrease gradually to 5.0% in 2045 and beyond. The actual cost
of benefits for 1997 and projected costs for 1998 were used. Increasing the
assumed health care cost trend rates by 1% in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1997, by
$78,757 and the net periodic postretirement benefit cost for 1997 by $6,006.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% on December 31, 1997 and 1996.
Net periodic postretirement benefit cost includes the following components:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
AMORTIZATION OF TRANSITION OBLIGATION OVER 20 YEARS $115,522 $115,522 $115,522
SERVICE COST 70,746 74,248 50,083
INTEREST COST 208,159 199,528 219,448
AMORTIZATION (GAIN)/LOSS -0- -0- 1,477
RETIRED EMPLOYEE REIMBURSEMENTS -0- -0- (29,979)
- -----------------------------------------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $394,427 $389,298 $356,551
=============================================================================================================================
NOTE 10 STOCK BASED COMPENSATION
In 1992, the Company adopted a stock option plan (the "Plan") pursuant to which,
the Board of Directors may grant stock options to officers and key employees.
Stock options are granted with an exercise price equal to the stock's fair
market value at the date of grant. Stock options may not have a term in excess
of 10 years, and have vesting periods that range between one and five years from
the grant date. The Plan authorized grants of options up to 169,400 shares of
authorized but unissued common stock.
At December 31, 1997, there were 2,655 additional shares available for grant
under the Plan. The per share weighted average fair value of stock options
granted during 1997 was $7.77 on the date of grant. The fair value was arrived
at using the Black Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield 3.64%, risk free interest
rate of 5.78%, expected life of 8 years, and a 20.17% volatility ratio. The per
share weighted average fair value of stock options granted during 1996 was $7.06
on the date of grant. The fair value was arrived at using the Black Scholes
option-pricing model with the following weighted-average assumptions: expected
dividend yield 3.97%, risk free interest rate of 5.61%, expected life of 8
years, and a 26.19% volatility ratio.
The Company applies APB Opinion No. 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for stock options in the
accompanying consolidated financial statements. Had the Company determined
compensation cost based on the fair value of its stock options at the grant date
under SFAS No. 123, the Company's net income and earnings per share would have
been reduced to pro forma amounts indicated on the following table:
19
NOTE 10 STOCK BASED COMPENSATION CONTINUED
1997 1996
- --------------------------------------------------------------------------------
NET INCOME:
AS REPORTED $ 9,855,594 $ 9,179,000
PRO FORMA 9,770,589 9,103,674
- --------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
AS REPORTED $ 3.04 $ 2.63
PRO FORMA 3.01 2.61
================================================================================
The full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net income amounts because
compensation cost is reflected over an average vesting period of three years and
pro forma net income reflects only options granted in 1997 and 1996.
Stock option activity during the periods indicated is as follows:
1995 NUMBER OF SHARES WTD. AVG. EXERCISE PRICE
- --------------------------------------------------------------------------------
BEGINNING BALANCE 66,739 $21.65
EXERCISED (453) 19.00
- --------------------------------------------------------------------------------
OUTSTANDING AT YEAR END 66,286 21.65
================================================================================
EXERCISABLE AT YEAR END 39,616 $19.85
================================================================================
1996 NUMBER OF SHARES WTD. AVG. EXERCISE PRICE
- --------------------------------------------------------------------------------
BEGINNING BALANCE 66,286 $21.65
GRANTED 59,900 28.90
EXERCISED (302) 20.07
- --------------------------------------------------------------------------------
OUTSTANDING AT YEAR END 125,884 25.11
================================================================================
EXERCISABLE AT YEAR END 55,867 $20.49
================================================================================
1997 NUMBER OF SHARES WTD. AVG. EXERCISE PRICE
- --------------------------------------------------------------------------------
BEGINNING BALANCE 125,884 $25.11
GRANTED 42,000 35.49
EXERCISED (2,413) 24.69
FORFEITED (2,199) 29.14
- --------------------------------------------------------------------------------
OUTSTANDING AT YEAR END 163,272 27.73
================================================================================
EXERCISABLE AT YEAR END 73,046 $22.41
================================================================================
The following summarizes outstanding and exercisable options at December 31,
1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING AVERAGE NUMBER REMAINING
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE CONTRACTUAL LIFE
- -----------------------------------------------------------------------------------------------------------------------------
$16.00-25.99 52,152 4.77 years $19.42 52,152 4.77 years
$26.00-35.49 111,120 8.57 years $31.64 20,894 7.67 years
- -----------------------------------------------------------------------------------------------------------------------------
163,272 73,046
=============================================================================================================================
20
NOTE 11 INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $5,267,001 $5,141,924 $4,618,404
SHAREHOLDERS' EQUITY FOR UNREALIZED
GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES 730,017 (610,964) 1,256,792
- -----------------------------------------------------------------------------------------------------------------------------
$5,997,018 $4,530,960 $5,875,196
=============================================================================================================================
The income tax expense (benefit) attributable to income from operations is
summarized as follows:
CURRENT DEFERRED TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
1997:
FEDERAL $4,393,155 $ (396,527) $3,996,628
STATE 1,342,478 (72,105) 1,270,373
- -----------------------------------------------------------------------------------------------------------------------------
$5,735,633 $ (468,632) $5,267,001
=============================================================================================================================
1996:
FEDERAL $4,013,153 $ (98,571) $3,914,582
STATE 1,222,737 4,605 1,227,342
- -----------------------------------------------------------------------------------------------------------------------------
$5,235,890 $ (93,966) $5,141,924
=============================================================================================================================
1995:
FEDERAL $3,386,535 $ 72,026 $3,458,561
STATE 1,106,481 53,362 1,159,843
- -----------------------------------------------------------------------------------------------------------------------------
$4,493,016 $ 125,388 $4,618,404
=============================================================================================================================
The primary reasons for the differences between income tax expense and the
amount computed by applying the statutory federal income tax rate to earnings
are as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
STATUTORY FEDERAL INCOME TAX RATE 34.0% 34.0% 34.0%
STATE INCOME TAXES, NET OF FEDERAL TAX BENEFIT 5.5 5.7 5.7
TAX EXEMPT INCOME (4.0) (4.4) (5.2)
ALL OTHER (0.7) 0.6 0.1
- -----------------------------------------------------------------------------------------------------------------------------
34.8% 35.9% 34.6%
=============================================================================================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
RESERVE FOR LOAN/LEASE LOSSES $ 1,925,851 $1,845,971
COMPENSATION AND BENEFITS 1,263,880 1,100,999
OTHER 196,823 98,440
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 3,386,554 3,045,410
- -----------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
LEASING TRANSACTIONS 1,447,323 1,542,802
PREPAID PENSION 799,064 645,499
DEPRECIATION 212,014 223,735
OTHER 194,297 368,150
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 2,652,698 2,780,186
- -----------------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSET $ 733,856 $ 265,224
=============================================================================================================================
This analysis does not include the recorded deferred tax liabilities of $777,556
and $47,540 related to the unrealized appreciation in the available-for-sale
securities portfolio as of December 31, 1997 and 1996, respectively.
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable income
and the projected future taxable income over the periods in which the temporary
differences comprising the deferred tax assets will be deductible. Based on its
assessment, management determined that no valuation allowance is necessary.
21
NOTE 12 COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases land, buildings, and equipment under operating lease
arrangements extending to the year 2042. Rental expense included in operating
expenses amounted to $332,404 in 1997, $339,588 in 1996, and $363,266 in 1995.
The future minimum rental commitments as of December 31, 1997 for all
non-cancelable operating leases are as follows:
1998 $ 320,381
1999 326,045
2000 314,335
2001 284,153
2002 291,490
Thereafter $3,981,778
Most leases include options to renew for periods ranging from five to 20 years.
Options to renew are not included in the above future minimum rental
commitments.
The Company, in the normal course of business, is a party to financial
instruments with off balance sheet risk to meet the financial needs of its
customers. These financial instruments include loan commitments, standby letters
of credit, and unused portions of lines of credit. The contract, or notional
amount, of those instruments represents the Company's involvement in particular
classes of financial instruments.
The Company's maximum potential obligation to extend credit for loan commitments
(unfunded loans and unused lines of credit) and standby letters of credit
outstanding on December 31 was as follows:
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
LOAN COMMITMENTS $67,336 $69,195
STANDBY LETTERS OF CREDIT 1,627 1,145
UNDISBURSED PORTION OF COMMERCIAL LINES OF CREDIT 12,396 11,604
COMMITMENT TO INVEST IN LIMITED PARTNERSHIP REGISTERED AS A
SMALL BUSINESS INVESTMENT COMPANY 1,856 -0-
- -----------------------------------------------------------------------------------------------------------------------------
$83,215 $81,944
=============================================================================================================================
Commitments to extend credit (including lines of credit) are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Standby letters of credit
are conditional commitments written by the Trust Company to guarantee the
performance of a customer to a third party. Management uses the same credit
policies in making commitments to extend credit and standby letters of credit as
are used for on balance sheet lending decisions. Based upon management's
evaluation of the counterparty, the Trust Company may require collateral to
support commitments to extend credit and letters of credit. Since some
commitments and letters of credit are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash flow
requirements.
In 1997, the Company committed to invest $2,475,000 in a limited partnership
formed to operate a Small Business Investment Company (SBIC). As of December 31,
1997, the Company had advanced $618,750, which is carried utilizing the equity
method of accounting as an other asset on the Company's consolidated statements
of condition. On December 31, 1997, the cost of the Company's investment in the
SBIC approximates fair value.
NOTE 13 EARNINGS PER SHARE
Calculation of Basic Earnings Per Share (Basic EPS) and Diluted Earnings Per
Share (Diluted EPS) is as follows:
INCOME AVERAGE SHARES PER SHARE
FOR YEAR ENDED DECEMBER 31, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------
BASIC EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS $9,855,594 3,244,726 $3.04
EFFECT OF DILUTIVE SECURITIES
OPTIONS 37,610
DILUTED EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS PLUS ASSUMED CONVERSIONS $9,855,594 3,282,336 $3.00
- -----------------------------------------------------------------------------------------------------------------------------
22
NOTE 13 EARNINGS PER SHARE CONTINUED
INCOME AVERAGE SHARES PER SHARE
FOR YEAR ENDED DECEMBER 31, 1996 (NUMERATOR) (DENOMINATOR) AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------
BASIC EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS $9,179,000 3,485,565 $2.63
EFFECT OF DILUTIVE SECURITIES
OPTIONS 18,190
DILUTED EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS PLUS ASSUMED CONVERSIONS $9,179,000 3,503,755 $2.62
- -----------------------------------------------------------------------------------------------------------------------------
The diluted average shares calculation for 1996 excludes an average of 36,252
options with a range of exercise prices between $28.90 and $31.36 because at
various times during the year, the exercise price was greater than the average
market price.
INCOME AVERAGE SHARES PER SHARE
FOR YEAR ENDED DECEMBER 31, 1995 (NUMERATOR) (DENOMINATOR) AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------
BASIC EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS $8,717,811 3,538,626 $2.46
EFFECT OF DILUTIVE SECURITIES
OPTIONS 23,174
DILUTED EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS PLUS ASSUMED CONVERSIONS $8,717,811 3,561,800 $2.45
- -----------------------------------------------------------------------------------------------------------------------------
NOTE 14 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1997 and 1996. The carrying
amounts shown in the table are included in the consolidated statements of
condition under the indicated captions.
Estimated Fair Value of Financial Instruments:
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
Financial Assets:
CASH AND CASH EQUIVALENTS $ 22,088,775 $ 22,088,775 $ 25,318,664 $ 25,318,664
SECURITIES - AVAILABLE-FOR-SALE 176,660,315 176,660,315 167,903,720 167,903,720
SECURITIES - HELD-TO-MATURITY 36,910,971 37,881,959 37,752,933 38,784,390
LOANS/LEASES 377,183,969 382,473,656 350,409,423 352,792,209
Financial Liabilities:
TIME DEPOSITS $185,435,402 $199,034,483 $155,832,604 $158,225,089
OTHER DEPOSITS 291,264,268 291,264,268 271,534,289 271,534,289
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE 57,998,453 58,773,108 89,992,723 90,715,339
OTHER BORROWINGS 27,005,000 27,046,094 15,005,000 15,086,781
=============================================================================================================================
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the consolidated
statements of condition for cash and short-term instruments approximate the fair
value of those assets.
SECURITIES: Fair values for securities are based on quoted market prices. When
no secondary market exists to quote a market price, the book value of the
security is used as its fair value. Note 2 discloses the fair values of
securities.
LOANS/LEASES: For variable rate loans/leases that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair value of fixed rate loans/leases was estimated using discounted cash flow
analyses, and interest rates currently offered for loans/leases with similar
terms and credit quality.
23
NOTE 14 FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED
DEPOSITS: The fair values disclosed for demand deposits (e.g. interest and
non-interest checking) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., the carrying amounts). The carrying amounts of
variable rate money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for fixed rate time
deposits and repurchase agreements are estimated using a discounted cash flow
calculation that applies current interest rates to a schedule of aggregate
expected monthly maturities.
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS: The carrying amounts of
Federal funds purchased and securities sold under agreements to repurchase with
maturities of 90 days or less approximate their fair values. Fair values of
repurchase agreements with maturities of more than 90 days are estimated using
discounted cash flow analyses based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements. OTHER BORROWINGS:
The fair value of borrowings was estimated using discounted cash flow analysis,
using the weighted average interest rate on the outstanding debt.
OFF BALANCE SHEET INSTRUMENTS: The fair value of outstanding loan commitments
and standby letters of credit are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements,
the counterparties' credit standing and discounted cash flow analyses. The fair
value of these instruments approximates the value of the related fees and is not
material.
NOTE 15 REGULATION AND SUPERVISION
The Company and the Trust Company are subject to various regulatory capital
requirements administered by Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action ("PCA"), The Trust Company must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off balance sheet
items as calculated under regulatory accounting practices. Capital amounts and
classifications of the Company and the Trust Company are also subject to
qualitative judgments by regulators concerning components, risk weightings, and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require the maintenance of minimum amounts and ratios (set forth in
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Management believes that the Company and the Trust Company meet all
capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Trust Company as well capitalized under
the regulatory framework for PCA. To be categorized as well capitalized, the
Company and the Trust Company must maintain total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the capital
category of the Trust Company.
Actual capital amounts and ratios of the Company and the Trust Company are as
follows:
REQUIRED REQUIRED
TO BE TO BE
ACTUAL ADEQUATELY CAPITALIZED WELL CAPITALIZED
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AMOUNT/RATIO AMOUNT/RATIO AMOUNT/RATIO
- ---------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
THE COMPANY (CONSOLIDATED) $60,013/16.4% >$29,327/>8.0% >$36,658/>10.0%
- -
TRUST COMPANY $57,930/15.9% >$29,169/>8.0% >$36,461/>10.0%
- -
TIER I CAPITAL (TO RISK WEIGHTED ASSETS)
THE COMPANY (CONSOLIDATED) $55,426/15.1% >$14,663/>4.0% >$21,995/>6.0%
- -
TRUST COMPANY $53,367/14.6% >$14,585/>4.0% >$21,877/>6.0%
- -
TIER I CAPITAL (TO AVERAGE ASSETS)
THE COMPANY (CONSOLIDATED) $ 55,426/8.9% >$24,888/>4.0% >$31,110/>5.0%
- -
- ---------------------------------------------------------------------------------------------------------------------------
TRUST COMPANY $ 53,367/8.6% >$24,796/>4.0% >$30,995/>5.0%
- -
- ---------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
THE COMPANY (CONSOLIDATED) $56,420/16.1% >$27,987/>8.0% >$34,984/>10.0%
- - - -
TRUST COMPANY $55,408/15.9% >$27,907/>8.0% >$34,884/>10.0%
- - - -
TIER I CAPITAL (TO RISK WEIGHTED ASSETS)
THE COMPANY (CONSOLIDATED) $52,047/14.9% >$13,994/>4.0% >$20,991/>6.0%
- - - -
TRUST COMPANY $51,047/14.6% >$13,954/>4.0% >$20,931/>6.0%
- - - -
TIER I CAPITAL (TO AVERAGE ASSETS)
THE COMPANY (CONSOLIDATED) $ 52,047/8.9% >$23,512/>4.0% >$29,390/>5.0%
- - - -
TRUST COMPANY $ 51,047/8.7% >$23,505/>4.0% >$29,381/>5.0%
- - - -
==========================================================================================================================
24
NOTE 15 REGULATION AND SUPERVISION CONTINUED
The Company is subject to legal limitations on the amount of dividends that can
be paid to shareholders. Generally, dividends are limited to retained net
profits for the current year and two preceding years which amounted to
$16,421,286 as of December 31, 1997.
The Trust Company is required to maintain reserve balances by the Federal
Reserve Bank of New York. On December 31, 1997, the reserve requirement totaled
$5,446,000.
NOTE 16 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed Financial Statements for Tompkins County Trustco, Inc. (the "Parent
Company") as of December 31, 1997, are presented below. The Parent Company was
established on January 1, 1996; therefore, no information prior to that date is
presented.
CONDENSED STATEMENTS OF CONDITION
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Assets
CASH $ 108 $ -0-
AVAILABLE-FOR-SALE SECURITIES, AT FAIR VALUE 2,361 1,000
INVESTMENT IN BANK, AT EQUITY 54,593 51,613
OTHER ASSETS 16 -0-
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 57,078 $ 52,613
=============================================================================================================================
Liabilities
DEFERRED TAX LIABILITY $ 167 $ -0-
OTHER LIABILITIES 11 -0-
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 178 $ -0-
=============================================================================================================================
Shareholders' Equity
COMMON STOCK $ 326 $ 334
SURPLUS 29,935 32,529
UNDIVIDED PROFITS 26,769 20,925
TREASURY STOCK (571) (604)
NET UNREALIZED GAIN OR LOSS ON AVAILABLE-FOR-SALE SECURITIES 1,074 66
DEFERRED I.S.O.P. BENEFIT EXPENSE (633) (637)
- -----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 56,900 $ 52,613
=============================================================================================================================
Total Liabilities and Shareholders' Equity $ 57,078 $ 52,613
=============================================================================================================================
CONDENSED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS FROM AVAILABLE-FOR-SALE INVESTMENTS $ 92 $ -0-
DIVIDENDS RECEIVED FROM BANK 7,614 11,814
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Income 7,706 11,814
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES 79 -0-
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Undistributed Income of Subsidiary $ 7,627 $ 11,814
=============================================================================================================================
APPLICABLE INCOME TAXES $ (13) $ -0-
EQUITY IN UNDISTRIBUTED INCOME OF BANK 2,216 (2,635)
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 9,856 $ 9,179
=============================================================================================================================
25
NOTE 16 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Operating Activities
NET INCOME $ 9,856 $ 9,179
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES:
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK (2,216) 2,635
INCREASE IN OTHER ASSETS (16) -0-
INCREASE IN OTHER LIABILITIES 11 -0-
PROVISION FOR DEFERRED INCOME TAXES (13) -0-
OTHER (4) -0-
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 7,618 11,814
- -----------------------------------------------------------------------------------------------------------------------------
Investing Activities
PURCHASE OF SECURITIES (933) (1,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (933) (1,000)
- -----------------------------------------------------------------------------------------------------------------------------
Financing Activities
DIVIDENDS PAID ON COMMON STOCK (4,011) (3,813)
PURCHASE OF TREASURY STOCK -0- (627)
REPURCHASE OF COMMON SHARES (2,670) (6,720)
DECREASE IN I.S.O.P BENEFIT EXPENSE 4 320
TREASURY STOCK SOLD 41
ISSUANCE OF COMMON STOCK 59 26
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (6,577) (10,814)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and cash equivalents 108 -0-
- -----------------------------------------------------------------------------------------------------------------------------
Cash at January 1 -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------
Cash at December 31 $ 108 $ -0-
=============================================================================================================================
NOTE 17 UNAUDITED INTERIM FINANCIAL INFORMATION
Selected unaudited quarterly financial data for 1997 and 1996 follows:
1997
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME $11,322 $11,657 $11,933 $11,900
INTEREST EXPENSE 4,765 5,018 5,176 5,223
NET INTEREST INCOME 6,557 6,639 6,757 6,677
PROVISION FOR LOAN/LEASE LOSSES 414 153 263 238
INCOME BEFORE INCOME TAXES 3,729 3,778 3,986 3,630
NET INCOME 2,432 2,463 2,601 2,360
NET INCOME PER COMMON SHARE (BASIC) .74 .76 .81 .73
NET INCOME PER COMMON SHARE (DILUTED) .73 .75 .80 .72
1996
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME $10,353 $10,630 $11,081 $11,223
INTEREST EXPENSE 4,214 4,302 4,577 4,823
NET INTEREST INCOME 6,139 6,328 6,504 6,400
PROVISION FOR LOAN/LEASE LOSSES 204 251 258 497
INCOME BEFORE INCOME TAXES 3,384 3,547 3,925 3,465
NET INCOME 2,200 2,314 2,532 2,133
NET INCOME PER COMMON SHARE (BASIC) .62 .65 .72 .64
NET INCOME PER COMMON SHARE (DILUTED) .62 .65 .71 .64
26
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
======================
Management is responsible for preparation of the consolidated financial
statements and related financial information contained in all sections of this
annual report, including the determination of amounts that must necessarily be
based on judgments and estimates. It is the belief of management that the
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances, and
that the financial information appearing throughout this annual report is
consistent with the consolidated financial statements.
Management depends upon the Company's system of internal accounting controls
to meet its responsibility for reliable financial statements. The system is
designed to provide reasonable assurance that assets are safeguarded and that
transactions are executed in accordance with management's authorization and are
properly recorded.
The Audit/Examining committee of the Board of Directors, composed solely of
outside directors, meets periodically and privately with management, internal
auditors and independent auditors, KPMG Peat Marwick LLP, to review matters
relating to the quality of financial reporting, internal accounting control, and
the nature, extent and results of audit efforts. The independent and internal
auditors have unlimited access to the Audit/Examining committee to discuss all
such matters. The consolidated financial statements have been audited by the
Company's independent auditors for the purpose of expressing an opinion on the
consolidated financial statements.
/s/ James J. Byrnes /s/ Richard D. Farr
- ----------------------- -----------------------
Chief Executive Officer Chief Financial Officer
REPORT OF KPMG PEAT MARWICK LLP,
INDEPENDENT AUDITORS
======================
BOARD OF DIRECTORS AND SHAREHOLDERS
TOMPKINS COUNTY TRUSTCO, INC.
We have audited the accompanying consolidated statements of condition of
Tompkins County Trustco, Inc. and subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tompkins
County Trustco, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
SYRACUSE, NEW YORK
JANUARY 16, 1998
27
MANAGEMENT DISCUSSION OF FINANCIAL CONDITION & RESULTS OF OPERATIONS 1997
OVERVIEW
Tompkins County Trustco ("the Company") is the parent company of Tompkins
County Trust Company (the "Trust Company" or "the Bank"). The Trust Company is
an independent community bank whose primary service area is Tompkins County, New
York and surrounding areas. Through the Bank, the Company provides a full range
of financial services including: deposits, trust and investment services,
commercial lending, consumer lending, residential mortgage lending, cash
management, and electronic banking.
The Company generates interest and other income through finance charges on
outstanding loan balances, loan servicing fees, interest on investments, trust
and investment service fees, and processing fees. Primary costs are related to
the funding of loans receivable and investments. Costs include interest paid on
deposits, securities sold under agreements to repurchase, and borrowings.
The following analysis is intended to provide the reader with a further
understanding of the consolidated financial condition and results of operations
of the Company and its operating subsidiary for the periods shown. It should be
read in conjunction with the consolidated financial statements and notes thereto
for a full understanding of this analysis.
28
TABLE 1 - SOURCES OF INTEREST INCOME
% OF TOTAL % OF TOTAL % OF TOTAL
(IN THOUSANDS) 1997 REVENUE* 1996 REVENUE* 1995 REVENUE*
- -----------------------------------------------------------------------------------------------------------------------------
Residential real estate $12,254 21.61% $10,818 19.08% $ 9,618 16.96%
Commercial and commercial
real estate* 13,049 23.01% 12,110 21.36% 11,453 20.20%
Consumer 6,444 11.37% 6,758 11.92% 7,054 12.44%
Lease financing 994 1.75% 963 1.70% 913 1.61%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest on
loans and leases* 32,741 57.74% 30,649 54.06% 29,038 51.21%
- -----------------------------------------------------------------------------------------------------------------------------
Interest on securities and
other investments* $14,977 26.41% $13,271 23.41% $ 12,097 21.34%
=============================================================================================================================
* INTEREST INCOME INCLUDES TAX-EQUIVALENCY ADJUSTMENTS FOR INCOME EXEMPT FROM
FEDERAL INCOME TAXES.
RESULTS OF OPERATIONS
Net income for 1997 was $9.9 million, or $3.04 per basic share; increasing
from $9.2 million, or $2.63 per basic share in 1996; and $8.7 million, or $2.46
per basic share in 1995. The 15.6% growth in 1997 basic earnings per share
continues a growth trend that saw basic earnings per share increase by 6.9% in
1996, and 7.4% in 1995. Diluted earnings per share was $3.00 for the year ended
December 31, 1997, reflecting an increase of 14.5% from 1996. Per share earnings
growth has benefited from two privately negotiated stock repurchase
transactions, in which the Company repurchased 244,371 shares in October of
1996, and 80,000 shares in May of 1997. These two repurchase transactions are
primarily responsible for a 6.9% reduction in basic weighted average shares from
1996 to 1997.
Return on average shareholders' equity increased to 18.4% in 1997, compared
to 16.8% in 1996, and 17.0% in 1995. The improvement in return on average equity
in 1997 was achieved through a combination of 7.4% growth in net income, and a
1.9% reduction in average shareholders equity. Average shareholders' equity
declined as a result of the two stock repurchase transactions, which reduced
total shareholders' equity by a combined $9.4 million. The decline in
shareholders' equity from common stock repurchase transactions has been
partially offset by 1997 retained earnings of $5.8 million.
Return on average total assets has remained relatively stable over the past
three years, with a ratio of 1.61% for the year ended December 31, 1997,
compared to 1.62% in 1996, and 1.67% in 1995. The modest decline in the return
on average assets in 1996 is due to 8.5% growth in average assets during the
year, which outpaced the 5.3% growth in net income. The 1997 return on average
assets of 1.61% is little changed from the prior year as net income growth of
7.4% was closely matched by average asset growth of 8.3%.
The Company's primary source of revenue is interest income earned on its loan
and securities portfolios. Significant sources of interest income are detailed
in TABLE 1.
Other income sources include fees for providing trust and investment
services, merchant credit card processing fees, and service charges on deposit
accounts. Total 1997 income from each of these sources, as a percentage of total
revenue, amounted to 6%, 4%, and 3%, respectively.
NET INTEREST INCOME
Tax-equivalent net interest income has increased steadily over the past three
years from $24.9 million in 1995, to $26.5 million in 1996, and to $27.8 million
in 1997. TABLE 2 illustrates the trend in average earning assets and costing
liabilities, and the corresponding yield or cost associated with each. The table
shows a declining trend in tax-equivalent net interest margin from 5.05% in
1995, to 4.93% in 1996, and to 4.79% in 1997. The declining trend in net
interest margin is reflective of the competitive environment for deposits, which
has led to an increasing reliance on non-core funding sources to support asset
growth. Average non-core funding sources (time deposits of $100,000 and more,
securities sold under repurchase agreements, Federal funds purchased, and
borrowings) increased by $28.9 million from 1996 to 1997. Average core deposits
(total deposits less time deposits of $100,000 and more) increased by $18.2
million over the same period. This increased reliance on non-core funding
sources is largely responsible for the increase in the cost of interest bearing
liabilities from 4.15% in 1996 to 4.28% in 1997. The yield on earning assets
remained level at 8.27% for the years ended December 31, 1997 and 1996.
As net interest margin has narrowed in recent years, the Company maintained
growth in net interest income through growth in its earning asset base. Average
earning assets of $580.3 million for the year ended December 31, 1997, reflects
an 8.3% increase from average earning assets in 1996. The increase was split
between average loans, which grew by $27.6 million, and average securities which
grew by $21.5 million.
29
TABLE 2 - AVERAGE STATEMENTS OF CONDITION AND NET INTEREST ANALYSIS
DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE AVERAGE BALANCE AVERAGE BALANCE AVERAGE
(DOLLAR AMOUNTS IN THOUSANDS) (YTD) INTEREST YIELD/RATE (YTD) INTEREST YIELD/RATE (YTD) INTEREST YIELD/RATE
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Certificates of deposit
with other banks $ 0 $ 0 $ 907 $ 48 5.27% $ 0 $ 0
Securities (1)
U.S. Government securities 171,545 11,638 6.78% 151,698 10,021 6.59% 129,068 8,471 6.56%
State and municipal (2) 37,670 3,018 8.01% 37,756 3,065 8.10% 40,704 3,302 8.11%
Other securities (2) 4,444 321 7.22% 2,721 185 6.78% 4,675 324 6.93%
- -----------------------------------------------------------------------------------------------------------------------------
Total securities 213,659 14,977 7.01% 192,175 13,271 6.89% 174,447 12,097 6.93%
Federal Funds Sold 4,902 263 5.37% 8,789 468 5.31% 5,606 319 5.69%
Loans, net of
unearned income (3)
Residential real estate 151,013 12,254 8.11% 131,789 10,818 8.19% 116,299 9,618 8.27%
Commercial real estate 56,375 5,240 9.29% 41,324 3,859 9.31% 34,337 3,159 9.20%
Commercial loans (2) 81,634 7,809 9.57% 86,721 8,251 9.49% 85,479 8,294 9.70%
Consumer loans 60,532 6,444 10.65% 62,478 6,758 10.79% 65,957 7,054 10.69%
Lease financing 12,210 994 8.14% 11,875 963 8.09% 11,268 913 8.10%
- -----------------------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned income 361,764 32,741 9.05% 334,187 30,649 9.15% 313,340 29,038 9.27%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 580,325 47,981 8.27% 536,058 44,436 8.27% 493,393 41,454 8.40%
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 32,981 30,282 28,689
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $613,306 $566,340 $522,082
=============================================================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits
Interest-bearing deposits
Interest-bearing checking $ 59,111 $ 1,097 1.86% $ 55,698 $ 1,038 1.86% $ 53,929 $ 986 1.83%
Savings and money market 142,933 4,581 3.20% 140,410 4,450 3.16% 153,206 5,211 3.40%
Time deposits> $100,000 83,878 4,629 5.52% 44,143 2,363 5.34% 12,131 643 5.30%
Time deposits< $100,000 87,058 4,562 5.24% 81,115 4,289 5.27% 71,873 3,820 5.31%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 372,980 14,869 3.99% 321,366 12,140 3.77% 291,139 10,660 3.66%
Federal funds purchased and
securities sold under
agreements to repurchase 80,115 4,233 5.28% 92,930 4,831 5.18% 92,050 5,179 5.63%
Other borrowings 18,166 1,080 5.95% 16,186 946 5.83% 12,625 686 5.43%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 471,261 20,182 4.28% 430,482 17,917 4.15% 395,814 16,525 4.17%
- -----------------------------------------------------------------------------------------------------------------------------
Non interest-bearing deposits 80,417 74,141 68,834
Accrued expenses and
other liabilities 8,108 7,146 6,222
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 559,786 511,769 470,870
Shareholders' equity 53,520 54,571 51,212
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $613,306 $566,340 $522,082
=============================================================================================================================
Interest rate spread 3.99% 4.12% 4.23%
Impact of noninterest-
bearing liabilities 0.80% 0.81% 0.82%
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income/margin
on earning assets $27,799 4.79% $26,519 4.93% $24,929 5.05%
=============================================================================================================================
(1) AVERAGE BALANCES AND YIELDS ON AVAILABLE-FOR-SALE SECURITIES ARE BASED ON
HISTORICAL AMORTIZED COST.
(2) INTEREST INCOME INCLUDES THE TAX EFFECTS OF TAXABLE EQUIVALENT ADJUSTMENTS
USING A COMBINED NEW YORK STATE AND FEDERAL EFFECTIVE INCOME TAX RATE OF
41% IN 1997, 1996, AND 1995 TO INCREASE TAX EXEMPT INTEREST INCOME TO A
TAXABLE EQUIVALENT BASIS.
(3) NONACCRUAL LOANS ARE INCLUDED IN THE AVERAGE ASSET TOTALS PRESENTED ABOVE.
PAYMENTS RECEIVED ON NONACCRUAL LOANS HAVE BEEN RECOGNIZED AS DISCLOSED IN
NOTE 1 OF THE CONSOLIDATED FINANCIAL STATEMENTS.
30
TABLE 3 - ANALYSIS OF YEAR TO DATE CHANGES IN NET INTEREST INCOME
(DOLLAR AMOUNTS IN THOUSANDS)(TAXABLE EQUIVALENT)
1997 VS. 1996 1996 VS. 1995
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO CHANGE IN AVERAGE TO CHANGE IN AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Federal funds sold $ (209) $ 4 $ (205) $ 171 $ (22) $ 149
Interest bearing deposits (48) 0 (48) 48 0 48
Investments
Taxable 1,390 240 1,630 1,349 62 1,411
Tax-exempt 71 7 78 (233) 1 (232)
Loans
Taxable 2,507 (406) 2,101 1,860 (320) 1,540
Tax-exempt (7) (3) (10) 54 (69) (15)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 3,704 (158) 3,546 3,249 (348) 2,901
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest bearing deposits
Interest checking 63 (4) 59 33 22 55
Savings and money market 80 51 131 (387) (305) (692)
Time 2,455 84 2,539 2,117 (2) 2,115
Securities sold under
agreements to repurchase (701) 71 (630) 53 (393) (340)
Federal funds purchased 29 3 32 (4) (4) (8)
Other borrowings 117 18 135 204 55 259
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,043 223 2,266 2,016 (627) 1,389
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,661 $(381) $1,280 $ 1,233 $ 279 $ 1,512
=============================================================================================================================
Changes in net interest income occur from a combination of changes in the
volume of earning assets and costing liabilities, and the rate of interest
earned or paid on them. TABLE 3 illustrates changes in interest income and
interest expense attributable to changes in volume (change in average balance
multiplied by prior year rate), changes in rate (change in rate multiplied by
prior year volume), and the net change in net interest income. The net change
attributable to the combined impact of volume and rate has been allocated to
each in proportion to the absolute dollar amounts of the change.
Net interest income grew on a tax-equivalent basis by approximately $1.3
million from 1996 to 1997, compared to an increase of $1.5 million from 1995 to
1996. Growth in total interest income of $3.5 million from 1996 to 1997,
resulted from a $3.7 million increase in income due to a higher volume of
earning assets, offset by a $158,000 decline due to lower yields on earning
assets. A decline in loan yields was partially offset by increased yield on the
securities portfolio. Securities yields in 1997 were bolstered by the sale of
$10.7 million of available-for-sale securities, the proceeds of which were
reinvested in higher yielding securities.
Total interest expense grew by approximately $2.3 million from 1996 to 1997.
This compares to a $1.4 million increase in total interest expense from 1995 to
1996. An increased volume of interest bearing liabilities contributed nearly
$2.1 million to the increase in 1997 interest expense, while higher rates paid
on interest bearing liabilities added $223,000 to 1997 interest expense. Growth
in time deposits, particularly time deposits of $100,000 and over, was primarily
responsible for the increase in 1997 interest expense, with a $2.5 million
increase due to volume and an $84,000 increase due to higher rates. A reduced
volume of securities sold under agreements to repurchase helped offset some of
the increased expense associated with time deposit growth.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses represents management's estimate of
the expense necessary to maintain the reserve for loan and lease losses at an
adequate level. The provision for loan and lease losses declined to $1.1 million
in 1997, from $1.2 million in 1996. The lower provision in 1997 is largely
attributable to a reduced volume of net charge-offs in 1997, primarily in the
consumer and residential real estate portfolios. Net loan and lease losses
amounted to $868,000 in 1997, compared to $1.1 million in 1996, and $701,000 in
1995. Provisions for loan and lease losses in excess of actual net losses
amounted to $200,000 in 1997, compared to $75,000 in 1996, and $50,000 in 1995.
31
OTHER INCOME
Other income is an increasingly important source of revenue for the Company.
Other income of $8.7 million in 1997 represents an 11.8% increase over the $7.8
million reported in 1996. Other income has increased steadily as a percentage of
average assets from 1.34% in 1995, to 1.39% in 1996, to 1.44% in 1997. This
calculation has been adjusted for nonrecurring items, which include $85,000 in
securities losses in 1997, and a $250,000 gain on sale of student loans in 1995.
Income from trust and investment services continues to be the largest segment
of other income. The Trust and Investment Services Division generates fee income
through managing or providing custody services for investments of individuals,
businesses, personal trusts, estates, and employee benefits plans. Trust and
investment services income of $3.2 million in 1997, represents an 18.8% increase
over the $2.7 million reported in 1996. Increased fee income is attributable to
the continued growth in assets managed by, or in the custody of, the Trust and
Investment Services Division. Total assets managed by, or in the custody of, the
division had a market value of $838.8 million on December 31, 1997, compared to
$645.7 million on December 31, 1996, and $404.8 million on December 31, 1995. In
1996, the Trust and Investment Services Division began providing custodial
management services for the Bank's securities portfolio. The market value of
assets in the custody of the Trust and Investment Services Division included
Trust Company securities with a market value of $107.0 million on December 31,
1997, and $122.9 million on December 31, 1996. Excluding assets in custody for
the Bank, total Trust and Investment Services Division assets grew by 40% in
1997, and 29% in 1996.
The Trust and Investment Services Division is expected to remain important to
future revenue growth of the Company. Although the division primarily provides
services to customers in the Bank's market area of Tompkins County and
surrounding areas, the division currently manages assets for clients in more
than 40 states. In 1997, the Company expanded the reach of the Trust and
Investment Services Division through an affiliation with another community bank.
Through this affiliation, the Company will provide servicing and administrative
support to the trust department of the other bank.
Credit card merchant income contributed $2.2 million to total other income in
1997, representing an increase of 16.6% over the $1.9 million reported in 1996.
Growth in credit card merchant income is primarily attributable to growth in the
number of customers using the Bank's merchant credit card processing services.
Service charges on deposit accounts, other service charges, and other operating
income all showed improvement over 1996 income levels.
OTHER EXPENSE
The Company's net expense ratio (noninterest expense less recurring
noninterest income divided by average assets) has improved over the past three
years, reflecting success in management's cost control efforts. The net expense
ratio was 1.7% for the year ended December 31, 1997, compared to 1.7% in 1996,
and 1.9% in 1995. Other expenses as a percentage of average assets remained
level in 1997 and 1996 at 3.1%, compared to 3.2% in 1995.
Personnel related expenses comprise the largest segment of other expense,
representing approximately 52% of other expenses in 1997. Salary and wage costs,
which include incentive compensation, profit sharing, and contributions to the
employee investment and stock ownership plan, increased by 7.9% in 1997,
compared to a 5.5% increase in 1996. Pension and employee benefits expense
increased by 8.4% in 1997, following a decline of 3.9% in 1996.
Credit card operating expense correlates closely to the transaction volumes
for merchant credit card processing and customer credit card processing. The
1997 credit card operating expense of $2.0 million included $1.8 million related
to merchant credit card processing.
Other operating expenses totaled $4.6 million for the year ended December 31,
1997, compared to $4.1 million in the previous two years. Contributing to the
increase in 1997 was amortization expense of $100,000 related to a core deposit
intangible asset. The core deposit intangible asset, which is being amortized
over a five-year period, resulted from the Trust Company's acquisition of the
Odessa branch office in October 1996. Other expenses related to the addition of
the Odessa branch, added approximately $145,000 to total other expenses in 1997,
its first full year of operation.
Other operating expenses also increased due to an increased level of
donations to local not-for-profit organizations. Donations expense included in
other operating expense amounted to $190,000 in 1997, compared to $67,000 in
1996, and $73,000 in 1995.
PROVISION FOR INCOME TAXES
The provision for income taxes provides for Federal and New York State income
taxes. The 1997 provision was $5.3, compared to $5.1 million in 1996, and $4.6
million in 1995. The increasing trend is primarily due to increased levels of
taxable income. The effective tax rate for 1997 was 34.8%, compared to 35.9% in
1996, and 34.6% in 1995.
32
TABLE 4 - BALANCE SHEET COMPARISONS
AVERAGE BALANCE SHEET CHANGE (1996-1997)
(DOLLAR AMOUNTS IN THOUSANDS) 1997 1996 1995 AMOUNT PERCENTAGE
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $613,306 $566,340 $522,082 $46,966 8.29%
Earning assets* 580,325 536,058 493,393 44,267 8.26%
Total loans and leases,
net of unearned income 361,764 334,187 313,340 27,577 8.25%
Investments* 213,658 192,175 174,447 21,483 11.18%
Core deposits 369,519 351,364 347,842 18,155 5.17%
Deposits of $100,000 and more 83,878 44,143 12,131 39,735 90.01%
Federal funds purchased and securities
sold under agreements to repurchase 80,115 92,930 92,050 (12,815) (13.79%
Other borrowings 18,166 16,186 12,625 1,980 12.23%
Shareholders' equity 53,520 54,571 51,212 (1,051) (1.93%)
- -----------------------------------------------------------------------------------------------------------------------------
ENDING BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
Total assets $626,907 $591,344 $536,992 $35,563 6.01%
Earning assets* 591,904 555,953 505,257 35,951 6.47%
Total loans and leases,
net of unearned income 377,184 350,409 321,290 26,775 7.64%
Investments* 211,720 205,544 183,157 6,176 3.00%
Core deposits 379,572 357,345 356,416 22,227 6.22%
Deposits of $100,000 and more 97,128 70,022 14,215 27,106 38.71%
Federal funds purchased and securities
sold under agreements to repurchase 57,998 89,993 92,902 (31,995) (35.55%)
Other borrowings 27,005 15,005 12,000 12,000 79.97%
Shareholders' equity 56,900 52,613 55,091 4,287 8.15%
=============================================================================================================================
* BALANCES OF AVAILABLE-FOR-SALE SECURITIES ARE SHOWN AT AMORTIZED HISTORICAL COST
FINANCIAL CONDITION
During 1997, total assets grew 6.0% to $627 million, compared to $591 million
at December 31, 1996. TABLE 4 provides a comparison of average and year-end
balances of selected balance sheet categories over the past three years. As
illustrated in the table, asset growth in 1997 has been split between
investments and loans, with funding provided through growth in core deposits,
time deposits greater than $100,000, and borrowings. Increases in time deposits
and borrowings have been substantially offset by declines in Federal funds
purchased and securities sold under repurchase agreements as of December 31,
1997.
SHAREHOLDERS' EQUITY
The consolidated statements of changes in shareholders' equity of this annual
report detail the changes in equity capital, including payments to shareholders
in the form of cash dividends. The Company has continued the Bank's long history
of increasing cash dividends with an increase of 12.7% in 1997, which followed
an 11.1% increase in 1996. Dividends per share amounted to $1.24 in 1997,
compared to $1.10 in 1996, and $0.99 in 1995. Total dividends paid out
represented 40.7%, 41.5%, and 40.2% of net income after tax in each of those
years, respectively.
Total shareholders' equity was $56.9 million at December 31, 1997, compared
to $52.6 million at December 31, 1996, and $55.1 million in 1995. Total
shareholders' equity grew by 8.15% in 1997, although growth was slowed by the
repurchase of 80,000 shares of common stock on May 14, 1997. The shares, which
were returned to the status of authorized but unissued, were repurchased at
$33.38 per share for a total purchase price of $2.67 million. The 4.5% decline
in equity capital in 1996, was precipitated by a $6.7 million private stock
repurchase transaction, whereby, the Company repurchased 244,371 of its own
shares. The shares were purchased on October 22, 1996, at a price of $27.50 per
share and have been returned to the status of authorized but unissued. The
Company also purchased 22,000 shares of treasury stock in 1996 for $28.50 per
share, for a total purchase price of $627,000. The Board of Directors believes
the recent repurchases of Company stock have been excellent investment
opportunities for the Company and its shareholders, in light of the Company's
strong capital position and historically strong equity growth rate. In November
1996, the Board of Directors approved a stock repurchase program, which
authorizes the repurchase of up to $3 million in common stock in open market
transactions. No open market transactions have been completed under this
program.
33
TABLE 5 - MATURITY DISTRIBUTION
DUE AFTER ONE DUE AFTER FIVE
DUE IN ONE YEAR THROUGH YEARS THROUGH DUE AFTER
(DOLLAR AMOUNTS IN THOUSANDS) YEAR OR LESS YIELD FIVE YEARS YIELD TEN YEARS YIELD TEN YEARS YIELD
- -----------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. Treasury securities
and obligations of U.S.
Government agencies $18,433 6.55% $49,731 6.32% $66,988 7.10% $ -0- NA
- -----------------------------------------------------------------------------------------------------------------------------
$18,433 6.55% $49,731 6.32% $66,988 7.10% $ -0- NA
HELD-TO-MATURITY:
Obligations of state and
political subdivisions* $ 9,824 4.59% $22,444 5.33% $ 4,298 5.47% $ 345 6.24%
- -----------------------------------------------------------------------------------------------------------------------------
$ 9,824 4.59% $22,444 5.33% $ 4,298 5.47% $ 345 6.24%
- -----------------------------------------------------------------------------------------------------------------------------
Total $28,257 5.87% $72,175 6.01% $71,286 7.01% $ 345 6.24%
=============================================================================================================================
* YIELDS ON OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS ARE SHOWN BEFORE
TAX-EQUIVALENT ADJUSTMENTS.
In 1994, the Investment and Stock Ownership Plan (I.S.O.P.) borrowed
$1,650,000 from the Bank in order to purchase 55,000 shares of outstanding Trust
Company common stock. As directed by the Board of Directors, these shares are
being released by the I.S.O.P. to satisfy a significant portion of the Company's
annual obligations to its employees under the profit sharing plan. The I.S.O.P.
debt was recorded as a reduction to capital. Debt payments to the Bank are made
annually by the I.S.O.P. with profit sharing contributions and are recorded as
compensation expense with a corresponding increase to capital.
The Company and the Trust Company are subject to quantitative capital
measures established by regulation to ensure capital adequacy. Consistent with
the objective of operating a sound financial organization, the Company and the
Trust Company maintain capital ratios well above regulatory minimums, as
detailed in Note 15 of the consolidated financial statements.
SECURITIES
In 1997, the securities portfolio (net of fair value adjustments on
available-for-sale securities) increased 3.0% to $212 million, with 13.5% of
debt securities maturing in one year or less. Note 2 to the consolidated
financial statements details the types of securities held, the carrying and fair
values, and the contractual maturities. Qualified tax exempt debt securities,
primarily obligations of states and political subdivisions were $36.9 million,
or 17% of all securities at year end 1997, compared to $37.8 million, or 18% at
December 31, 1996. Mortgage-backed securities, consisting solely of securities
issued by U.S. Government agencies, totaled $30.7 million at December 31, 1997,
compared to $22.1 million at December 31, 1996.
Management's policy is to purchase investment grade securities which, on
average, have relatively short expected maturities to mitigate interest rate
risk and provide sources of liquidity without significant risk to capital. A
large percentage of securities are direct obligations of the Federal government
and its agencies. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
penalty.
The maturity distribution of debt securities as of December 31, 1997, along
with the weighted average yield of each category is presented in TABLE 5.
Balances are shown at amortized cost.
LOANS
Total loans and leases, net of unearned income, grew 7.6%, to $377 million at
December 31, 1997. Residential real estate loans grew $16.6 million or 12% in
1997, and comprised 42% of the total loan portfolio. Included in residential
real estate loans are home equity loans, which remained relatively unchanged
from 1996 to 1997 at approximately $20 million. Commercial real estate loans
increased by 29% during 1997, to $61.3 million, representing 16% of total loans.
TABLE 6 details the composition and volume changes in the loan portfolio over
the past five years.
The Company sells some of its residential mortgage loans to Federal agencies
and retains all servicing rights. No mortgage loans were sold in 1997. In 1996,
the Company sold approximately $201,000 of mortgage loans, compared to $500,000
sold in 1995. Mortgage servicing on sold loans will continue to provide fee
income. Residential mortgage loans serviced for others totaled $28.2 million at
December 31, 1997, compared to $32.4 million at December 31, 1996, and $36.1
million at December 31, 1995.
Approximately 68% of the consumer loan portfolio is made up of automobile
loan financing, which is generally rate sensitive and highly competitive.
Aggressive competition in this market has contributed to the 4% decline in the
consumer and other loan
34
TABLE 6 - LOAN CLASSIFICATION SUMMARY
(DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Residential real estate $159,297 $142,676 $122,223 $109,676 $ 95,355
Commercial real estate 61,342 47,674 37,518 31,250 23,192
Real estate construction 5,267 1,203 663 639 1,723
Commercial 78,612 85,044 87,159 83,917 87,631
Consumer and other 60,090 62,488 61,823 65,841 60,778
Leases 14,313 12,740 13,563 11,225 9,764
- -----------------------------------------------------------------------------------------------------------------------------
Total loans and leases 378,921 351,825 322,949 302,548 278,443
Less unearned income 1,737 1,416 1,659 1,461 1,397
- -----------------------------------------------------------------------------------------------------------------------------
Total loans and leases,
net of unearned income $377,184 $350,409 $321,290 $301,087 $277,046
=============================================================================================================================
category. Open-end consumer loans, consisting of credit cards and overdraft
lines of credit, amounted to $10.3 million at December 31, 1997, compared to
$10.7 million at year end 1996.
Consumer loans include $5.1 million in Federally guaranteed education loans
offered through the New York State Higher Education Assistance Corporation. The
Company has the option of holding student loans in the loan portfolio or selling
them. The Company sold $3.3 million of student loans in 1997, and $847,000 in
1996 with no material gain or loss in either year. During 1995, as a result of
changes in the way student loans are funded and originated through the Federal
government, and favorable market conditions, the Bank sold $10.3 million of
student loans, which represented most of the outstanding loans at the time of
the sale. A gain of approximately $250,000 was realized on the sale of student
loans in 1995.
The lease portfolio is comprised primarily of leases on vehicles for
consumers and small businesses. As competition for automobile financing has
increased, the consumer leasing portfolio experienced a decline from 1995 to
1996. A refocused effort in business leasing generated approximately $4 million
in new business leases in 1997, and helped raise the total leasing portfolio to
its highest level in five years.
THE RESERVE FOR LOAN/LEASE LOSSES
Management reviews the adequacy of the reserve for loan/lease losses on an
ongoing basis. Factors considered in determining the adequacy of the reserve and
the related loss provision include: management's approach to granting new
credit; the ongoing monitoring of existing credits by the internal loan review
department; the growth and composition of the loan and lease portfolio; comments
received during the course of independent examinations; current local economic
conditions; past due and nonaccrual loan statistics; and a rolling five-year
statistical review of loan and lease loss experience.
Management uses a model to measure some of these factors and the resulting
quantitative analysis, combined with qualitative assessments, comprise the basis
on which the adequacy of the reserve for loan/lease losses is determined. As a
result of this analysis, management increased the reserve to $5.0 million in
1997, representing 1.32% of total loans and leases outstanding at year end.
The allocated portions of the reserve, as illustrated in TABLE 7, reflect
management's estimates of specific known risk elements in the respective
portfolios. Among the factors considered in allocating portions of the reserve
by loan type are the current levels of past due, nonaccrual, and impaired loans.
The unallocated portion of the reserve represents risk elements in the loan
portfolio that have not been specifically identified. Factors considered in
determining the appropriate level of unallocated reserves include historical
loan loss history, current economic conditions, and expectations for loan
growth. The Company's historical loss experience is detailed in TABLE 8.
Despite the increasing trend in nonaccrual loans, a majority of the
nonaccrual loans are secured by real estate collateral, with approximately 57%
secured by first liens on one-to-four family residential properties. The
December 31, 1997, reserve for loan and lease losses provides coverage of 1.75
times nonperforming assets (loans past due 90 days and accruing, nonaccrual
loans, restructured troubled debt, and other real estate). Management is
committed to early recognition of possible loan problems and to maintaining a
conservative, strong reserve. Based upon management's review, the reserve is
believed to be adequate to absorb possible losses in the portfolio.
DEPOSITS AND OTHER LIABILITIES
Total deposits grew by $49.3 million in 1997. Deposit growth was split
between core deposits, which grew by $22 million, and time deposits of $100,000
and more, which increased by $27 million. Included in core deposits are
noninterest bearing demand
35
TABLE 7 - ALLOCATION OF THE RESERVE FOR LOAN/LEASE LOSSES
DECEMBER 31
(DOLLAR AMOUNTS IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Total loans outstanding
at end of year $377,184 $350,409 $321,290 $301,087 $277,046
=============================================================================================================================
Allocation of the reserve
by loan type
Commercial and
commercial real estate $ 1,270 $ 786 $ 1,591 $ 1,589 $ 1,686
Residential real estate 307 230 85 130 138
Consumer and all other 1,090 1,249 1,401 1,427 1,401
Unallocated 2,312 2,514 1,627 1,508 1,179
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 4,979 $ 4,779 $ 4,704 $ 4,654 $ 4,404
=============================================================================================================================
Allocation of the reserve as a
percentage of total reserve
Commercial and
commercial real estate 26% 17% 34% 34% 38%
Residential real estate 6% 5% 2% 3% 3%
Consumer and all other 22% 26% 30% 31% 32%
Unallocated 46% 52% 34% 32% 27%
- -----------------------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
=============================================================================================================================
Loan Types as a percent
of total loans
Commercial and
commercial real estate 35% 38% 34% 33% 34%
Residential real estate 41% 41% 41% 40% 40%
Consumer and all other 24% 21% 25% 27% 26%
- -----------------------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
=============================================================================================================================
Loans 90 days past
due and accruing $ 85 $ 28 $ 254 $ 241 $ 538
Nonaccruing loans 2,698 1,994 1,024 607 953
Troubled debt restructurings
not included above 483 428 205 134 219
Other real estate owned 66 100 229 231 94
=============================================================================================================================
Reserve as percent of loans
outstanding at end of year 1.32% 1.36% 1.46% 1.55% 1.59%
=============================================================================================================================
deposits, which comprised 18.4% of all deposits at December 31, 1997, compared
to 18.3% in 1996.
The Company's liability for securities sold under agreements to repurchase
amounted to $58.0 million at December 31, 1997, representing a $28.2 million
decrease from year end 1996. Securities sold under repurchase agreements are
arrangements with local customers of the Bank, in which the Bank agrees to sell
securities to the customer with an agreement to repurchase those securities at a
specified later date. Management generally views local repurchase agreements as
an alternative to large time deposits. The recent shift in liabilities from
repurchase agreements to time deposits has been intentionally influenced by
management in order to reduce the volume of securities pledged against
repurchase liabilities.
As of December 31, 1997, securities pledged to secure certain large deposits
and securities sold under repurchase agreements amounted to $162.0 million,
compared to $180.8 million as of December 31, 1996. Total securities pledged and
sold under repurchase agreements represented 76% of total securities on December
31, 1997, compared to 88% of total securities on December 31, 1996.
During 1997, the Company increased its borrowings from the Federal Home Loan
Bank (FHLB) by $12 million, to $27 million. Total debt outstanding with the FHLB
on December 31, 1997, included $7 million in fixed rate debt with an average
maturity of approximately five months, and $20 million in variable rate debt
with an average maturity of approximately eight months. The fixed rate debt
carries a weighted average rate of 6.18%. At December 31, 1997, the weighted
average rate on the variable rate debt was 5.90%.
36
TABLE 8 - ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES
(DOLLAR AMOUNTS IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Average loans outstanding
during year $361,764 $334,187 $313,340 $287,684 $272,729
=============================================================================================================================
Balance of reserve at
beginning of year $ 4,779 $ 4,704 $ 4,654 $ 4,404 $ 4,150
Loans charged-off:
Domestic:
Commercial, financial
and agricultural 138 46 83 34 321
Real estate - mortgage 39 148 50 59 117
Real estate - construction -0- -0- -0- -0- -0-
Installment loans
to individuals 1,101 1,286 611 430 450
Lease financing 8 11 4 1 39
Other loans 69 59 355 370 290
- -----------------------------------------------------------------------------------------------------------------------------
Total loans charged-off 1,355 1,550 1,103 894 1,217
- -----------------------------------------------------------------------------------------------------------------------------
Recoveries of loans
previously charged-off:
Domestic:
Commercial, financial
and agricultural 57 57 31 26 30
Real estate - mortgage 3 7 54 -0- -0-
Real estate - construction -0- -0- -0- -0- -0-
Installment loans
to individuals 394 324 201 242 160
Lease financing 4 7 17 13 17
Other loans 29 20 99 95 56
- -----------------------------------------------------------------------------------------------------------------------------
Total loans recovered 487 415 402 376 263
- -----------------------------------------------------------------------------------------------------------------------------
Net loans charged-off 868 1,135 701 518 954
Additions to reserve charged
to operations 1,068 1,210 751 768 1,208
- -----------------------------------------------------------------------------------------------------------------------------
Balance of reserve at
end of year $ 4,979 $ 4,779 $ 4,704 $ 4,654 $ 4,404
=============================================================================================================================
Net charge-offs as percent
of average loans
outstanding during year 0.24% 0.34% 0.22% 0.18% 0.35%
=============================================================================================================================
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure the availability of
adequate funding sources to satisfy the demand for credit, deposit withdrawals,
and business investment opportunities. The Trust Company's large, stable core
deposit base and strong capital position are the foundation for the Company's
liquidity position. Asset and liability positions are monitored through an
Asset/Liability Management committee, which reviews monthly reports on the
liquidity and interest rate sensitivity positions. Comparisons with industry and
peer groups of the Bank are also monitored.
Core deposits remain the key funding source, representing 79.6% of total
deposits, and 66.6% of total liabilities at December 31, 1997. Non-core
liabilities increased by 4.1% to $182.1 million at December 31, 1997, compared
to $175.0 million at December 31, 1996. The portion of non-core liabilities
maturing in one year or less totaled $180.1 million at December 31, 1997,
compared to $164.6 million at December 31, 1996. Short term investments
consisting of securities with maturities of one year or less, Federal funds
sold, and money market mutual funds increased 31.6% from $27.6 million to $36.3
million. The ratio of short term investments to short term non-core liabilities
improved from 15.8% at year end 1996, to 20.0% at year end 1997, indicating a
decreased volume of long term assets supported by short term non-core
liabilities.
Cash flow from the loan and investment portfolios are a significant source of
liquidity. Investment in residential mortgage loans, auto loans, and mort-
37
TABLE 9 - LOAN MATURITY
REMAINING MATURITY OF SELECTED LOANS AT DECEMBER 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS) TOTAL WITHIN 1 YEAR 1-5 YEARS AFTER 5 YEARS
- -----------------------------------------------------------------------------------------------------------------------------
Loan Maturity
Commercial real estate $ 61,342 $ 78 $ 3,969 $ 57,295
Construction 5,267 5,267 -0- -0-
Commercial 78,611 22,269 13,058 43,284
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 145,220 $ 27,614 $ 17,027 $ 100,579
=============================================================================================================================
TABLE 10 - INTEREST RATE RISK ANALYSIS
CONDENSED STATIC GAP - DECEMBER 31, 1997 REPRICING INTERVAL
CUMULATIVE
(DOLLAR AMOUNTS IN THOUSANDS) TOTAL 0-3 MONTHS 3-6 MONTHS 6-12 MONTHS 12 MONTHS
- -----------------------------------------------------------------------------------------------------------------------------
Earning assets $ 588,777 $ 130,811 $ 39,218 $ 85,605 $ 255,634
Interest-bearing liabilities 561,703 259,253 57,813 37,744 354,810
- -----------------------------------------------------------------------------------------------------------------------------
Net Gap position $ (128,442) $ (18,595) $ 47,861 $ (99,176)
- -----------------------------------------------------------------------------------------------------------------------------
Net Gap position as a percentage of total assets (20.49%) (2.97%) (7.63%) (15.82%)
- -----------------------------------------------------------------------------------------------------------------------------
gage-backed securities totaled approximately $139 million, $40 million, and $31
million, respectively at December 31, 1997. Aggregate amortization from monthly
payments on these assets provides significant cash flow to the Company. TABLE 9
details total scheduled maturities of selected loan categories.
Liquidity is enhanced by ready access to national and regional wholesale
funding sources including Federal funds purchased, securities sold under
agreement to repurchase, negotiable certificates of deposit, and FHLB advances.
The Bank is a FHLB member and has a borrowing relationship with the FHLB and a
correspondent bank, which provide secured and unsecured borrowing capacity. At
December 31, 1997, the unused borrowing capacity with the FHLB was $57.6
million. As a member of the FHLB, the Bank can use its residential mortgage
portfolio to secure additional borrowings from the FHLB. A recent collateral
evaluation of the Bank's loan portfolio indicates approximately $131.5 million
in real estate loan collateral that is available to pledge against FHLB
borrowings.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the volatility in earnings, resulting
from changes in interest rates. Each month the Asset/Liability Management
committee estimates the earnings impact of changes in interest rates and on
interest rate sensitivity. The findings of the committee are incorporated into
investment and funding decisions, and in the business planning process.
TABLE 10 is a condensed Gap report, which illustrates the anticipated
repricing intervals of assets and liabilities as of December 31, 1997. The
analysis reflects a liability sensitive position, suggesting that earnings would
benefit from a declining interest rate environment and would be hindered by a
rising rate environment.
Management uses a simulation model to assess the potential impact from
various interest rate movements. Based upon the simulation analysis performed as
of December 31, 1997, a 200 basis point upward shift in interest rates over a
one year time frame would result in a 3.6% decline in net interest income,
assuming management takes no action to address balance sheet mismatches. The
same simulation indicates that a 200 basis point decline in rates over a one
year period would increase net interest income by 1.2%. The simulation model is
useful in identifying potential exposure to interest rate movements; however,
management feels that certain actions could be taken to offset some of the
negative effects of unfavorable movements in interest rates. Although the
analysis reflects some exposure to rising interest rates, management feels the
exposure is not significant in relation to the earnings and capital strength of
the Company. Additional information regarding market risk of the Company's
financial instruments is provided in TABLE 11.
YEAR 2000 CONSIDERATIONS
Management has initiated an enterprise-wide program to prepare the Company's
computer systems and applications for the year 2000. It is anticipated that all
programming efforts will be completed by December 31, 1998, allowing adequate
time for testing. To date, confirmations have been received from the Company's
primary processing vendors that programs and testing are underway to address
pro-
38
TABLE 11 - REPRICING INTERVALS OF SELECTED FINANCIAL INSTRUMENTS
GREATER
(DOLLAR AMOUNTS IN THOUSANDS) 0-1 YEAR 1-2 YEARS 2-3 YEARS 3-5 YEARS THAN 5 YEARS TOTAL FAIR VALUE
- -----------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Available-for-sale debt securities $ 58,187 $39,583 $26,704 $25,618 $15,734 $165,826 $167,249
Average interest rate 6.81% 7.04% 6.72% 6.73% 7.22% 6.88%
Held-to-maturity securities 9,823 5,835 6,654 10,053 4,545 36,910 37,882
Average interest rate * 4.59% 5.32% 5.36% 5.33% 5.52% 5.16%
Loans 177,574 62,069 46,648 55,777 35,116 377,184 382,474
Average interest rate 9.26% 8.46% 8.74% 8.65% 7.61% 8.82%
Financial Liabilities:
Time deposits 165,191 13,094 3,366 3,784 -0- 185,435 199,034
Average interest rate 5.32% 5.41% 6.04% 5.64% NA 5.35%
Federal funds sold and securities sold
under agreements to repurchase 57,998 -0- -0- -0- -0- 57,998 58,773
Average interest rate 5.51% 5.51%
Fixed Rate Borrowings 7,005 -0- -0- -0- -0- 7,005 7,046
Average interest rate 6.18% 6.18%
Variable Rate Borrowings 20,000 -0- -0- -0- -0- 20,000 20,000
Average interest rate 5.90% 5.90%
=============================================================================================================================
* INTEREST RATE ON OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS IS
SHOWN BEFORE TAX-EQUIVALENT ADJUSTMENTS
cessing of transactions in the year 2000.
The Company expects to incur internal staff costs as well as consulting and
other expenses related to preparing the systems for year 2000. Testing and
conversion of system applications are expected to cost approximately $125,000
over the next two years. A significant portion of these costs are not likely to
be incremental costs, but rather will involve redeployment of existing
information technology resources.
Some hardware and software systems will be updated in 1998 to handle year
2000 processing; however, all significant systems that require enhancements were
already scheduled to be upgraded or replaced prior to December 31, 1999. The
cost of making these systems upgrades is considered part of the Company's normal
capital spending plan and is not included in the estimate of year 2000 costs.
RECENT ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers of Servicing of Financial Assets and Extinguishments
of Liabilities." The statement provides accounting and reporting standards for
transfers of servicing of financial assets and extinguishments of liabilities
based upon a consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets that are
sales, from transfers that are secured borrowings. The Company prospectively
adopted applicable sections of SFAS No. 125 effective January 1, 1997, without
material impact on its financial statements. Sections of SFAS No. 125, which
have been deferred by SFAS No. 127 will be prospectively adopted by the Company
on January 1, 1998. The expected impact on the Company's consolidated financial
statements is not material.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure." SFAS No. 129 establishes
standards for disclosing information about an entity's capital structure and is
effective for financial statement periods ending after December 31, 1997.
Adoption of SFAS No. 129 did not have an impact on the financial condition or
results of operations of the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. SFAS No. 130 is effective
for the Company in 1998 and the impact of adoption is not expected to be
material. In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 requires publicly held companies to report financial and other
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operation decision maker.
Specific information to be reported for individual segments includes profit or
loss, certain revenue and expense items, and total assets. A reconciliation of
segment financial informa-
39
tion to amounts reported in the financial statements would be provided. SFAS No.
131 is effective for the Company in 1998 and the impact of adoption is not
expected to be material.
FACILITIES AND SERVICES
The Company continues to invest in existing branches to maintain high quality
service to customers in the Bank's service area of Tompkins County and
surrounding areas. In 1997, the Main Office, Dryden Office, and Odessa Office
were renovated to improve handicap accessibility. Sales and service counters
were added to the Main Office and Dryden Office. These counters provide added
convenience to customers, while allowing Bank personnel to improve personal
service and sales interactions with customers.
Technology investments continue to be important as the Trust Company strives
to control costs while providing customers with convenient access to high
quality products and services. In 1997, the Company installed a document imaging
system to provide customers with account statements that contain computerized
images of checks used during the statement cycle. The image statements provide
customers with an organized record of transaction activity, while improving
efficiency and reducing costs for the Bank. The Trust Company expanded the
number of ATMs in its network in 1997, with the addition of its twenty-first
ATM, located in Alpine Junction, N.Y. The family of ACCESS products, which
includes voice response system, home banking, ATM access cards, and debit cards,
continues to be well received by customers. The Company anticipates offering
internet banking and internet access to Trust and Investment Services account
information by year end 1998.
The Company expanded its site on the World Wide Web to include data on its
financial performance as well as information on its products and services.
The Trust Company's Product and Services Analysis committee continues to
monitor and analyze product developments on both the local and national level.
This ongoing process positions the Trust Company to remain competitive and
provide a wide range of products to its customers.
COMPETITION
The Company and its operating subsidiary face aggressive competition from
other financial services providers who do business in Tompkins County and
surrounding areas. Local competition includes large regional commercial banks
with branches in Tompkins County, savings and loans, mortgage companies, and
large, income tax-exempt credit unions which enjoy economic advantages over
tax-paying financial institutions. Additionally, the ability of non-banking
financial institutions to provide services previously reserved for commercial
banks has intensified competition. Since non-banking financial institutions are
not subject to regulations such as the Community Reinvestment Act or the Federal
Deposit Insurance Corporation Improvement Act, among others, they can often
operate with increased flexibility and lower costs of compliance.
Nevertheless, the Company is well positioned to meet the demands of its
existing and potential customers, with state-of-the-art facilities, efficient
operations, and a broad range of financial services and products. The Company
continues to emphasize the advantages of banking with a locally headquartered,
independent commercial bank, as well as the ability for many of its services to
be accessed from any state in the country. The Trust Company is the only
remaining full-service commercial bank with its headquarters in Ithaca, N.Y.
Management believes this gives the Trust Company certain advantages in meeting
the needs of the local market, as the oldest continuously operating commercial
bank in Tompkins County.
40
BANKING OFFICERS
==================
JAMES J. BYRNES
President & Chief Executive Officer
FRANCIS E. BENEDICT
Executive Vice President,
Banking & Investments*
RICHARD M. DOLGE
Senior Vice President, Retail Banking
RICHARD D. FARR
Senior Vice President,
Chief Financial Officer
THOMAS J. SMITH
Senior Vice President, Credit Services
DONALD S. STEWART
Executive Vice President,
Investment Services
LAWRENCE A. UPDIKE
Senior Vice President,
Operations & Systems
* * * * * * * * * * * *
STEVEN E. BACON
Vice President, Commercial Banking
PAUL W. BANFIELD
Vice President, Commercial Banking
SAMUEL V. BREWER
Vice President, Trust Officer
EDWARD F. DAWSON
Vice President, Consumer
Credit Services
BENJAMIN E. HERRMANN
Vice President, Retail Banking
STEPHEN R. HOYT
Vice President, Commercial Banking
JAMES W. HULBERT
Vice President, Corporate Secretary
& Trust Officer
JOYCE P. MAGLIONE
Vice President, Personnel
H. CRAIG MILLER
Vice President, Residential
Mortgage Services
STEPHEN L. PATCHETT
Vice President, Commercial Banking
JOSEPH H. PERRY
Vice President, Trust Officer
CINDY L. SEAGER
General Auditor
PAMELA L. WAIT
Vice President, Retail Banking**
* * * * * * * * * * * *
TERRY G. BARBER
Assistant Vice President,
Data Processing
MICHELLE BENEDICT-JONES
Trust Officer
CHARLES E. BROWN
Senior Systems Programmer
DOUGLAS M. BROWN
Senior Accounting Officer
JOHN E. BUTLER
Trust Officer
LINDA M. CARLTON
Compliance Review Officer
JOAN M. CURTIS
Assistant Vice President,
Manager, Dryden
RONALD A. DAVENPORT
Assistant Vice President,
Community Marketing Manager
JEFFREY DOBBIN
Assistant Vice President,
Commercial Banking
JOSEPH P. DOYLE
Assistant Vice President,
Consumer Credit Services
CATHERINE H. ECKER
Customer Service Officer
FRANCIS M. FETSKO
Controller
MARCIA H. FINCH
Credit Card Manager
JAMES P. GIORDANO
Assistant Vice President,
Facilities Manager
SANDRA L. GROOMS
Consumer Loan Officer
ALAN R. GUREWICH
Assistant Vice President,
Consumer Credit Services
PAUL R. HARRINGTON
Assistant Vice President,
Manager, Trumansburg
CATHERINE L. HAUPERT
INVEST Representative
EILEEN K. HOYT
Trust Operations Manager
DIANA JAYNE
Assistant Vice President,
Manager, Triphammer
BRUCE A. KOBASA
Assistant Vice President, Operations
WILLIAM K. KOHM
Card Systems Manager
JOANNE LELIK
Assistant Vice President,
Manager, West End
RICHARD W. W. LIND
Assistant Vice President,
Central Recovery
RANDY C. LOVELL
Assistant Vice President,
Assistant Auditor
RICHARD S. LYNN
Assistant Vice President,
Mortgage Credit
PAUL E. MARINO
Assistant Vice President, Retail
Investment Officer
LILLIAN E. MARSHALL
Operations Officer
MARILYN E. MAZZA
Manager, Cornell Campus
Store
J. DOUGLAS MELENS
Manager, Odessa**
JOELLEN F. MENDELIS
Assistant Vice President,
Mortgage Loan Officer
KAREN E. PARKES
Assistant Vice President,
Commercial Banking
CYNTHIA A. PHOENIX
Credit Manager
MARTHA K. PRESTON
Assistant Vice President,
Mortgage Loan Officer
PATRICIA A. PULLMAN
Trust Officer
NAKETO SCOTT
Assistant Vice President,
Deposit Operations
DONALD F. SEACORD
Assistant Auditor
SIU-SING W. SHANTUR
Assistant Vice President,
Loan Operations
C. KING STEVENS
Trust Officer
TIMOTHY S. SWARTZ
Manager, Plaza
ANN-MARIE TUTTON
Assistant Vice President, Marketing
SUSAN D. UPDIKE
Assistant Treasurer**
* EFFECTIVE DECEMBER 31,1997, MR. BENEDICT RETIRED AS AN EXECUTIVE OFFICER;
HOWEVER, HE REMAINS WITH THE BANK AS A CONTRACT EMPLOYEE, PERFORMING MANY OF THE
SAME DUTIES IN AN ADVISORY CAPACITY.
** APPOINTMENTS EFFECTIVE JANUARY 20, 1998.
41
EXECUTIVE MANAGEMENT GROUP
==========================
================================================================================
[GROUP PHOTO - GRAPHIC OMITTED]
================================================================================
SEATED, LEFT TO RIGHT:
JAMES J. BYRNES, RICHARD D. FARR, FRANCIS E. BENEDICT, DONALD S. STEWART.
STANDING, LEFT TO RIGHT:
THOMAS J. SMITH, LAWRENCE A. UPDIKE, RICHARD M. DOLGE
42
BOARD OF
DIRECTORS
JAMES J. BYRNES
Chairman, President &
Chief Executive Officer
BONNIE H. HOWELL
Vice Chairman; President &
Chief Executive Officer,
Cayuga Medical Center
JOHN E. ALEXANDER
President, The CBORD Group, Inc.
REEDER D. GATES
President, R. D. Gates, Ltd.
WILLIAM W. GRISWOLD
President & Chief Operating Officer,
Ontario Telephone Company &
Trumansburg Home Telephone
Company
CARL E. HAYNES
President, Tompkins Cortland
Community College
EDWARD C. HOOKS
Bank Counsel, Attorney-at-Law,
Partner, Harris Beach & Wilcox
ROBERT T. HORN, JR.
Physician
LUCINDA A. NOBLE
Retired Director, Cooperative
Extension, Cornell University
HUNTER R. RAWLINGS, III
President, Cornell University
FRANK H. T. RHODES
President Emeritus, Cornell
University
THOMAS R. SALM
Vice President, Business &
Administrative Affairs, Ithaca College
MICHAEL D. SHAY
Chairman of the Board,
Evaporated Metal Films Corporation
ADVISORS TO THE BOARD
OF DIRECTORS
DALE R. CORSON
HOWARD I. DILLINGHAM
CHARLES E. TREMAN, JR.
ADVISORY BOARDS
TRUMANSBURG
JOHN A. DELANEY
Superintendent of Schools,
Trumansburg School District
MARTIN E. HAYES
President/Treasurer
Finger Lakes Fire & Casualty
DONALD F. OLIVER, JR.
Manager, Taughannock Falls
State Park
JOSEPH L. SIBLEY
Proprietor
Ness-Sibley Funeral Home
CALISTA A. SMITH
Executive Director, Trumansburg
Conservatory of Fine Arts, Inc.
SUSAN L. WHITAKER
Owner,
Black Sheep Design
DRYDEN
LINDA L. BRUNO
Business Manager,
Dryden School District
JAMES V. KOCH
President, Sturges Electronics
Products Company, Inc.
CHARLES G. MCMULLEN
Professor of Psychology
Tompkins Cortland
Community College
MAHLON R. PERKINS
Attorney
KAREL R. WESTERLING
Local Businessman
FREDERIC A. "BEN" WILLIAMS
Consultant, Public Affairs
NORTHEAST
WILLIAM E. COOKE
President, Bill Cooke
Cadillac-Olds-Toyota, Inc.
THOMAS R. KURZ
General Manager & Chief
Operating Officer, Advanced
BioAnalytical Services, Inc.
ANDREA S. PRICE
Superintendent of Schools
Lansing Central School District
MICHAEL R. PRONTI
Director of Exceptional Education
BOCES
LYNNETTE M. SCOFIELD
Owner, Finger Lakes Fashion
Accessories
JOHN S. STEWART, SR.
Retired
BANKING
LOCATIONS
Main Office, The Commons, 273-3210
Campus Store Office, Cornell
University, 257-1909
Corners Community Center Office,
Hanshaw Road, 257-5857
Dryden Office, North Street Extension,
Dryden, 844-8282
East Hill Plaza Office,
1012 Ellis Hollow Road, 277-2561
Kendal at Ithaca Office,
Savage Farm Drive
Odessa Office, 100 Main Street,
Odessa, 594-3338
Plaza Office, 775 S. Meadow Street,
273-5600
Pyramid Mall Office, Pyramid Mall,
257-7900
Seneca Street Drive-In,
118 E. Seneca Street
Triphammer Road Office,
2251 North Triphammer Road,
257-2656
Trumansburg Office, Main Street,
Trumansburg, 387-7331
West End Office,
701 W. Seneca Street, 273-6171
BANK ACCESS CENTERS
(ATMS)
Main Office, The Commons
Big Al's Get-N-Go, McLean
Byrne Dairy, Meadow Street
Campus Store, Cornell University
Corners Community Center Office
Dryden Office
East Hill Plaza Office
Ithaca College Student Union
Kinko's Copy Center,
409 College Avenue
Jim's Place
Rt. 13, Alpine Junction
Lansing Xtramart,
N. Triphammer Rd. & Route 34B
Plaza Office
Pyramid Mall, Food Court
Seneca Street Drive-Up/Walk-Up
(2 ATMs)
ShortStop Deli, 200 W. Seneca Street
Cayuga Medical Center
Triphammer Road Office (2 ATMs)
Trumansburg Office
West End Office
[LOGO] PRINTED ON RECYLCLED PAPER
43
Corporate Information
=====================
CORPORATE OFFICES
- --------------------------------------------------------------------------------
Tompkins County Trustco, Inc.
The Commons
P.O. Box 460
Ithaca, NY 14851
(607) 273-3210
Web site: www.tompkinstrust.com
E-mail: thetrustco@aol.com
STOCK LISTING
- --------------------------------------------------------------------------------
Tompkins County Trustco, Inc. common stock is traded on the American Stock
Exchange under the symbol TMP. At the close of business on December 31, 1997
there were 998 shareholders of record.
ANNUAL SHAREHOLDERS' MEETING
- --------------------------------------------------------------------------------
All shareholders are invited to attend the annual meeting on Wednesday, April
29, 1998, at 7:30 p.m., Eastern Standard Time in the ballroom of the Triphammer
Lodge and Conference Center, One Sheraton Drive, Ithaca, New York.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
This plan is administered by The Bank of New York, as your Agent. It offers a
convenient way for shareholders to increase their investment in the Company. The
plan enables shareholders to reinvest all or part of their cash dividends or
make additional cash payments with some restrictions, in order to purchase
shares of Tompkins County Trustco, Inc. common stock without incurring charges
for brokerage commissions or service charges. Shareholders who are interested in
this plan may receive a Plan Prospectus and enrollment card by writing or
calling the Corporate Secretary at (607) 273-3210.
FORM 10-K
- --------------------------------------------------------------------------------
Copies of the Company's Form 10-K (Annual Report) for 1997, filed with the
Securities and Exchange Commission, may be obtained by shareholders, by written
request, from Richard D. Farr, Senior Vice President and Chief Financial
Officer, P.O. Box 460, Ithaca, New York 14851.
INQUIRIES
- --------------------------------------------------------------------------------
Shareholder questions can be answered by contacting the Company's Transfer Agent
THE BANK OF NEW YORK
1-800-524-4458
E-mail address:
Shareowner-svces@bankofny.com
Address Shareholder Inquiries to:
Shareholder Relations Department - 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
Send certificates for transfer and
address changes to:
Receive and Deliver Department - 11W
P.O. Box 11002
Church Street Station
New York, NY 10286
Answers to many of your shareholder questions and requests for forms are
available by visiting The Bank of New York's Web site at:
http://stock.bankofny.com
44